Cap Rate: Defined And Explained
Author:
Miranda CraceMar 7, 2024
•5-minute read
Rocket Mortgage® doesn't offer commercial real estate loans at this time.
If you’re a real estate investor or are thinking about becoming one, you’re probably interested in finding good deals on investment properties you can flip or rent. When you know a market well, it may be easy to see that a property is a winner. But as you begin to grow your holdings, you’ll need a more sophisticated system based on metrics.
The capitalization rate (cap rate) is a metric that's very important to real estate investors. They use it to help evaluate properties and find good deals. Let’s take a look at what cap rates are, what they tell you and how to calculate them.
What Is A Cap Rate In Real Estate?
Cap rate is a measurement used to estimate and compare the rates of return on multiple commercial or residential real estate properties. In this article, we’ll focus on residential rental real estate – specifically one- to four-unit multifamily homes – held for commercial or investment purposes.
Cap rates are calculated by dividing a property’s net operating income (NOI) by its current market value.
Cap rates can provide valuable insight into a property. But the cap rate isn’t the only metric used to evaluate a real estate investment. Investors will also want to consider other factors such as:
- Return on investment (ROI)
- Internal rate of return (IRR)
- Gross rent multiplier (GRM)
- A property’s characteristics and location