Cap rate is a percentage that shows the rate of return of a real estate investment. The higher the number, the better of a return it is producing making it a better investment.
A 7.5% cap rate means the property will generate a net income of 7.5% of the property's value. If said property is worth $100,000, the cap rate would signify a net operating income of $7,500.
If all you are worried about is the return, a higher cap rate is better since it will net you more money. But what often comes with more earning potential is a larger risk, so you will have to deal with more problems and things that can go wrong. This is not how it always works but generally the higher return is the higher the risk profile is for some reasons.
The 2% cap rate rule is a general rule of thumb for real estate investors that states you should only invest in a property if it has a cap rate of at least 2%.
Cap rate and yield are similar but they are indeed different. Cap rate uses the property's value while yield uses the property's cost.
Cap rate helps an investor assess their profitability and return potential on a property. This number will be close to the profit you can expect but will not be exact.
Create Date: September 4, 2024
Last Modified Date: September 04, 2024
