Someone please explain Cap Rate to me as if I'm in 1st grade

[Lee Syndergaard]

I've read about cap rate, heard it discussed on the podcast, but still don't have a grasp on it. How would you explain it to a new guy, using small words?

"Layman's terms. None of that inside, b******* jargon that nobody understands." -Mr. Shirley, Christmas Vacation

:)

[Allan Smith]

It's a way to measure how much money a rental property makes in comparison to how much money the property is worth. It makes it easier to compare assets to each other. Ignores financing since that can skew ROI.

to calculate cap rate: take the net profit for the year (ignore financing costs like mortgage payments), divide that by price of the property.

if a rental makes 6k and cost 100k, cap rate is 6%.

its useful because a $1m property making only 6k per year would be a low performing asset, while a 100k house is doing fine. It puts them on the same level to compare how good they are.