How To Determine the Capitalization Rate, or Cap Rate of a Real Estate Investment Property

by David Gerlitz on April 19, 2011

The Capitalization Rate, or Cap Rate, is an important real estate investment cost to consider. It is a basic metric for determining the value of an investment property. So how to you determine the cap rate in an investment property?

The Cap Rate is the net operating income divided by price. Basically, it is a ratio of what your percentage return would be if you owned the property free and clear.

How To Determine the Capitalization Rate, or Cap Rate of a Real Estate Investment PropertyHere’s an example: Let’s say you purchased a property with a million dollars cash. You have no mortgage or other debt payments on it. The Net Operating Income is $60,000 per year. That is the amount of cash it is generating for you annually. Your return is 6 percent because 60,000 divided by one million is .06. The cap rate is 6.

Capitalization Rate is just one of several points to consider when deciding on a real estate investment property. Investment Property Colorado can help you find the right real estate investment to meet your needs. Call us today 720-306-8017!

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