Learning how to calculate CAP rate is easy!
The CAP rate or capitalization rate is the ratio of Net Operating Income to property asset value.
Net Operating Income / Purchase Price = CAP Rate
Suppose the property you’re purchasing costs $120,000 and the Net Operating Income is $12,640, then:
$12,640 / $120,000 = 0.1053
$12,640 / $120,000 x 100 = 10.53%
The CAP rate in this example is 10.53%.
The CAP rate is particularly useful if we purchase the property for all cash. But even when we’re not, it is good to know the CAP rate. A CAP rate greater than 10% is generally considered good. Adjust it to suit your needs.
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