Cap rate... I don't understand you.

[Edward Damhuis]

I know what the definition of a cap rate is but for some reason it's not sinking in. Can someone please elaborate just a tad for me?

[Russell Brazil]

The cap rate is your expected profit after all expenses divided by how much you paid for the property if you paid all cash. Lets take a real simple example. 

You pay $100,000 for a property. You rent it for $1,000 a month ($12,000 a year) . You have expenses of $5,000 a year. So your profit is $7,000 a year. Your cap rate is then 7%. ($7,000 profit divided by $100,000 purchase price)