How do you determine it?
A capitalization rate is NOI divided by the value. It’s what the annual rate of return would be if you paid with no debt service. The higher the cap rate, the higher the income is in relation to the value. Ofcourse the opposite for a lower cap rate.
In appraisal terms it would be called direct capitalization. Because it’s just a simple formula everyone uses it. However before you close on a commercial property have an appraiser use yield capitalization a better value.
I agree with you, but the definition of cap rate in the rei club glossary doesn’t agree with you.
According to them, cap rate is the annual income divided by the net income. Thus the lower the cap rate, the better.
As a result of your original question I read the definition in the glossary and it’s wrong. It’s absolutely 100%
NOI/ Market Value= Cap rate
When I was 16 I decided appraising was going to be my foot in the door into RE. So I paid 1100 for classes and an additional 550 for income capitalization courses only to be told I wasn’t old enough for the stupid license.
A good rule of thumb for analyzing financial information is to understand different ratios and how they are used. Don’t rely on this website for information on mathmatical ratios. Rely on a Finance book or website.