Cap Rate
Cap Rate or Capitalization Rate is a ratio used to represent the return an investment would provide if the investment is purchased with all cash, without financing.
The formula for Cap Rate is:
Cap Rate = Net Operating Income / Purchase Price x 100%
Net Operating Income = Gross Income – Operating Expenses
Gross income includes income from all sources such as rents, parking, storage, laundry facilities, etc.
Operating expenses include expenses used to operate the property. These expenses include taxes, insurance, maintenance, property management, etc.
What’s not included in these calculations are financing costs and income taxes.
Cap Rate is best used to compare the subject property with other similar properties in the same area.
Here is an example of Cap Rates in the Houston area for different property types.
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