In other cases, the cap rate is an “initial” or “going-in” cap rate, which reflects the forecasted NOI for the first 12 months of ownership. For example, if a property generates $500,000 of NOI in the first year of ownership and it sold for $8 million, the initial cap rate is 6.25% ($500,000 divided by $8,000,000).Ī cap rate represents a snapshot in time. In some cases, the cap rate is a “trailing cap rate,” which represents the NOI generated at the property for the preceding 12-month period. The cap rate is calculated by taking the Net Operating Income (NOI), which is the property revenue, minus the necessary operating expenses, and dividing it by the purchase price.
Think of a cap rate as the dividend one would receive in the first year if the property were acquired with all cash. The question is simple but the answer is complicated because valuing real estate never comes down to a single metric. We’ve acquired properties with cap rates below zero and passed on others with cap rates above 15%.Ī cap rate is the rate of return you’d expect to receive from a property during the first year of ownership, excluding the cost to improve the property and financing costs. Many investors ask us what capitalization rate (cap rate) we used to acquire a property.
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