Capitalization rate is the percentage rate of return estimated from the net income of a piece of property.
The capitalization rate is the rate of return that a property would generate if it was purchased with all cash and not financed. So, if you were to pay $1,000,000 cash for a building and it generated $100,000 in net income, your “cap rate” would be 10%. See Below:
Net Operating Income (NOI): $100,000
(divided by) Purchase Price or Value: $1,000,000
(equals)
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