Viewing articles for the category Returns Analysis
In the real estate investing world, the use of leverage when purchasing assets is a virtual certainty.
The capitalization rate, or cap rate, is one of the tools used to value commercial real estate properties. Other methods include price per square foot, comparable sales, and the “cost approach”, where one estimates the cost of reproducing the subject property. The cap rate, however, is arguably the most common property value assessment metric. A property’s cap rate is the ratio of net operating income (NOI) to the property’s market value. Formulaically, one could define cap rate as the following: