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Updated over 7 years ago on . Most recent reply

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John S Lewis
  • Jackson, NJ
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166
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What does Cap Rate mean, really?

John S Lewis
  • Jackson, NJ
Posted

Can someone please tell me in laymans terms what the cap rate is?  I've read definitions over and over, but I still don't get it.  Sorry feel like the dunce cap is on.

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Natalie Schanne
  • Real Estate Agent
  • Princeton, NJ
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Natalie Schanne
  • Real Estate Agent
  • Princeton, NJ
Replied

@John S Lewis - Cap Rate is essentially your profit after expenses divided by the cost you paid for the asset. So, maybe your $100,000 property is expected to bring in $12,000/yr in rent (1% rule or $1,000/mo) but with all your property taxes, insurance, repairs, property management fees, vacant months (lower income), you only have $6,000 of profit in your bank account at the end of the year. Cap rate is that $6,000 of profit / $100,000 cost of the property = 6%. So, it is like getting a 6% return on your invested capital of $100,000.

When you have a loan, like 75%, you might consider a cash on cash return. You are collecting ($6,000 profit - cost of debt service) / 25,000 cash invested. This usually increases your return %.

The profit in real estate is called NOI or net operating income.

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