Cap Rate (Capitalization Rate)
En español: Tasa de capitalización (cap rate)
The capitalization rate is a building's net operating income divided by its price, expressed as a percentage. It is the market's shorthand for how much annual income a dollar of purchase price buys, before any loan. A lower cap rate means buyers accept less income per dollar, usually because they expect growth or safety; a higher one means they demand more, usually because they see risk or work.
Cap rate=NOIPrice
Price=NOICap rate
- NOI
- The property's net operating income for the year, taken from its operating statements and rebuilt on actual expenses.
- Price
- The purchase price, or the value being tested.
- Cap rate
- The rate closed sales are clearing in the same property class and submarket, not the rate printed on a listing.
- Read backward it sets price: the market supplies the rate, the building the NOI, and what comes out is the value of the income, not of the property.
- Blind to rent growth, rollover, deferred capital, and the loan. Two buildings at the same cap rate can be opposite investments.
- The exit cap in a ten-year projection is an assumption, not a measurement, and it usually does the most work in a seller's return.
- A cap rate quoted without saying whose NOI it used is a marketing number.
Eight units in Little Havana, asking $2.0M.
The seller is not asking for a price, he is asking for a cap rate the market is not paying. That distance is the negotiation.
Related terms
All termsNOI (Net Operating Income)
Net operating income is what a property earns from operations in a year: all collected income minus operating expenses, before any mortgage payment, income tax, or capital projects.
FinanceCash Flow
Cash flow is what actually lands in the owner's pocket in a period: net operating income minus the mortgage payment and minus the capital dollars the building consumed.
InvestmentProforma
A proforma is the projected income and expense statement for a property: what the next owner is being asked to believe.
Terms arrive with the writing.
The glossary grows as the Journal does, one email when something worth reading goes up. No noise.
Unsubscribe anytime. See our Privacy Policy.