The capitalization (cap) rate
The capitalization (cap) rate is a handy tool used to determine a property’s: - yield, as a rate of return based on the asking price sought by the seller; and - pricing, based on yields sought by buyers as a rate of return. But how does the cap rate work, and how do agents use it when assisting income property clients? WHAT DOES THE CAP RATE MEASURE? When an income property is presented for sale, the cap rate is presented as the yield from rental operations, in relation to the seller’s asking price. Here, yield needs to be distinguished from profit. Both are stated as percentage figures and represent a return on invested capital, typically the price paid for a property. A yield is the annual measure of net income generated by the operation of a rental property (residential or nonresidential). Also, it can be said that the yield a rental property produces is the property’s annual net operating income (NOI). Profit, on the other hand, is the measure of gain realized on the sale of prop