How to Calculate a commercial CAP Rate.

November 8, 2017

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. 

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