What is a CAP Rate?
Also known as a capitalization rate, the cap rate is a discount rating that is used to determine the current or present value of the accumulated assets that will create future earnings. Utilized in both projecting revenue for a business over a period of time and in evaluating the rate of return on a mortgage, the cap rate normally is calculated income taxes are extracted net income. The cap rate is generally determined by dividing the net operating income associated with the enterprise by the market value times one hundred. Calculating the current cap rate is an excellent means of ensuring that the business or investment is actually continuing to yield a return. In the best of circumstances, the hope is that the cap rate will demonstrate a relatively risk free return and possibly even a premium over time. However, the cap rate can also be used as an indicator that the investment has some potential problems. When the cap rate does not demonstrate a rate of return that is considered equi
A cap rate (or capitalization rate) is used to measure a propertys value or price based upon the income. The mathematical equation to compute a propertys cap rate is income divided by price or value; as you can see it is essentially the return based on the assets value. An increase in a cap rate will lead to a lower value (eg. $5,000 / 7% cap rate = $71,429; $5,000 / 6% cap rate = $83,333). Note that what most people refer as a cap rate is actually the going in cap rate, which is based on the first years income. When performing a DCF (discounted cash flow), you may want to determine the price at which you can sell the property this is known as a terminal cap rate. Typically, investors use a higher terminal cap rate (anywhere from .5% to 1.5% higher than the going-in cap). What is the correct cap rate for X type of property? Cap rates vary on a case by case basis. When weighing out investement alternatives, investors will often look at the risk of the asset and determine what price they
