Capitalization Rate?

General Real Estate Investing
1

I am a bit confused by cap rates… can anyone please give a a good definition or examples of good and bad cap rates? Thanks for your help!

2

Johnny,

My interpretation of Cap Rates is the percentage of your investment that would be returned from 1 year of ownership of the property if you paid cash for it (Return on Investment where you do not use OPM). It is calculated by taking total income minus expenses other than interest expense and dividing it by the total cost of the property. For example a 10 percent Cap Rate indicates that you should get 10 percent of the amount that you invested back in 1 year of ownership.

HTH,
Wilson

3

Wilson,

Thanks for the input! That makes alot of sense…

Johnny

4

Think of the cap rate as the percentage of the purchase price that you’re paid back after one year of ownership - without a mortgage.

If you want 8% of the purchase price back vs. 10% of the purchase price back, you’d pay two different prices, no?

I posted a free cap rates report on my website if you’d a more in depth explanation.

5

Name: johnnyonthespot
Posts: 13 (0.004 per day)
Position: Member
Date Registered: October 18, 2004, 09:48:32 AM
Last Active: December 04, 2006, 02:00:06 PM

Johnny hasn’t been on here in a little while, but that was a clever way of getting your website in a post…

6

hahah not the first time either :rolleyes

7

Here’s a definition of cap rates I came across:

Capitalization rate is the ratio between the income produced by an asset and its capital cost (the original price paid to buy the asset) or alternatively its current market value.