What is a Cap Rate?
The capitalization rate (cap rate) is a measure of the return on investment for a commercial real estate property. It is calculated by dividing the net operating income (NOI) of the property by its current market value. The NOI is the annual rental income of the property, minus any operating expenses such as property taxes, insurance, and maintenance costs.
The cap rate is expressed as a percentage and reflects the expected rate of return on an investment in the property. A higher cap rate indicates a higher expected return on investment, while a lower cap rate indicates a lower expected return.
The cap rate is often used by investors to evaluate the potential profitability of a commercial real estate property, as well as to compare the expected returns of different properties. It is important to note that the cap rate is a rough estimate of the return on investment and may not accurately reflect the true profitability of a property in all cases. Factors such as the location, condition, and quality of the property, as well as the current market conditions, can all affect the cap rate.
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