Capitalization rate, commonly known as Cap Rate, is the Net Operating Income divided by the sales price. The Cap Rate tells you how well your invest performs if you bought the property in cash. This number is frequently used in commercial and investment real estate to determine the value and profitability of a property. To find the cap rate, you divide the NOI by the sales price.
Let's pull the example used in the NOI blog post and figure out what you would need to pay for a property that has a NOI of $55,000 to get a 10% cap rate.
55,000 = 550,000
So, we'd need to purchase an investment property, with a NOI of $55,000 at $550,000 to get a 10% cap rate.
Let's double check our math.
55,000 = .1 or 10%
This is the last post of a serious entitled: The Top 10 Terms of Commercial/Investment Real Estate.