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If you’re new to real estate investing, you may have come across the term “cap rate” and wondered what it means. Put simply, the capitalization rate, or cap rate, is a way to measure the potential return on investment for a property.

Cap rates are calculated by dividing a property’s net operating income (NOI) by its market value. NOI is the income generated by a property, minus the expenses associated with running it, such as property taxes, maintenance costs, and insurance.

For example, let’s say you’re considering purchasing a small apartment building with an asking price of $1 million. The total annual rent collected from tenants is $100,000, and the annual expenses associated with the property, including property taxes and maintenance costs, are $20,000. The property’s NOI would be $80,000 ($100,000 – $20,000).

To calculate the cap rate for this property, you would divide the NOI ($80,000) by the property’s market value ($1 million) and multiply the result by 100 to get a percentage. In this case, the cap rate would be 8% ($80,000 ÷ $1 million x 100).

Cap rates are important for real estate investors because they provide a quick way to assess the potential profitability of a property. A higher cap rate generally indicates a higher potential return on investment, but it’s important to consider other factors, such as the location, condition, and market trends, before making an investment decision.

In summary, cap rates are a useful tool for real estate investors to quickly evaluate the potential return on investment for a property. By understanding the basic formula for calculating cap rates and considering other factors that may impact a property’s profitability, you can make informed investment decisions.

If you’re interested in learning more about real estate investing, we encourage you to reach out,  schedule a call and discover how we can help you achieve your financial goals through real estate investing.

 

 

About Ian Webb

 IanWebbInvestments.com is actively investing in Edmonton area real estate for a number of years.
His mission is to provide an above-average return on investment (R.O.I) for his investor partners and himself.
It is truly a win-win way of investing!

Ian offers his investor partners hands-free investment opportunities. If you are interested to learn how to earn an above-average return on your investment, backed by a solid asset, and without the hassle of being a landlord, please contact Ian.

For more information about Ian and his investment program,
please call (250) 470-1354, or visit  https://ianwebbinvestments.com