What is CAP rate ? It is a rate of return that you get yearly on the commercial property. For example:
Purchase price$ 1,000,000.
Net Operating Income , NOI = 100.000.
100,000/1,000,000 = 10% CAP Rate.
The difference on borrowing rate and CAP rate is what you make on your investment at the end of the day. If you borrower at 6%, and your CAP rate is 10%, then you will make 4% net.
Loan amount that you can get based on the cap rate :
NOI / 1.25 and then divide that by the borrowing rate. For example :
100,000/1.25 = 80,000 / .06 =$1,333,333. That means you can borrow up to $1,333,333 to buy that property unless you require to put a down payment and which makes the loan allowed lower.