What is a Capitalization Rate (Cap Rate)? – David Reecher
The cap rate is a ratio used to estimate the return on investment of a real estate property, such as an apartment building. It is calculated by dividing the net operating income of a property in a given year by the purchase price or current value of the property. Net operating income is the income derived from the property after subtracting operating expenses. For example, an apartment building that recently sold for \$1,000,000 and generates \$100,000 in income after expenses has a capitalization rate of 10%.