What is a CAP Rate ?
Direct Capitalization (CAP) is a method used to covert a
property's annual income, into an estimate of the property's value.
Direct Capitalization Rate Calculation
The Direct Capitalization Rate (CAP Rate) is defined as
follows:
Value = Net
Operating Income__
Overall Capitalization Rate
For Example:
V = $3,913,043
NOI = 450,000
CAP Rate = .115
$3,913,043 = $450,000
.115
The CAP Rate in the
above example is 11.5% (.115 X 100 = 11.5)
Other derivatives of the
formula are as follows:
Net Operating Income = Overall Capitalization Rate X
Value
Overall Capitalization
Rate = Net Operating Income
Value
The formula for calculating Net
Operating Income is as follows:
Potential gross income (all figures are on a annual basis)
Scheduled
rent $xxxx
Other income $xxxx
Total potential gross
income $xxxx
Vacancy and collection loss
-xxx
Effective gross
income $xxxx
Operating expenses
Fixed $xx
Variable $xx
Replacement allowance $xx
Total operating
expenses -$xxxx
NET OPERATING
INCOME $XXXX
