Investor clients often want to know the capitalization (cap) rate of a potential property. Cap rate is net operating income (NOI) divided by the sales price or value of the property. NOI is gross annual income minus operating expenses, but not including income taxes and mortgage.
Cap rate = NOI/current market value.
A five-unit apartment building with gross monthly rents of $3,750 would have a maximum gross annual rent of $45,000 ($3,750 x 12 = $45,000). If the total annual expenses were $25,200, the NOI would be $19,800 ($45,000 – $25,200). If the sales value of the property was $450,000 the cap rate would be 4.4% ($19,800/$450,000).
This link will take you to a free online cap rate calculator. (Calculator is for informational purposes only and has not been verified for accuracy)
The cap rate is a more useful tool in multiplexes and commercial real estate than with single-family homes or small apartment buildings. Although small apartment buildings will often use cap rate in advertising media. The average operating expenses will be more consistent when there are multiple rental units rather than only a few. And, of course, most investors will want to know what their return will be after the mortgage is paid.
We are here to help with all aspects of the rental market. Both residential and commercial.
Contact us for more information.
There are no warranties, express or implied, including fitness for a particular purpose, made with respect to this communication. Nothing found herein should be construed as an attempt to offer or render a legal opinion or otherwise engage in the practice of law. You should obtain the advice of an attorney well versed in these matters.
Facebook
Twitter
Pinterest
Copy Link