What is the Capitalization Rate (Cap Rate)?

What is the Capitalization Rate (Cap Rate)- Sophisticated investors use multiple financial techniques to estimate value when considering the purchase of a multi-family apartment building. Cap rate is a commercial real estate metric that measures a property’s unleveraged return (without debt) based on the net operating income (NOI) the property generates. CapRate is a standard metric used in the industry, but its usually just the starting place when estimating property value. The easiest way to think of Cap Rate is the expected rate of return on an all-cash purchase. The Cap Rate is simply a gauge to help investors compare investment opportunities. The higher the Cap Rate the higher the profit and perceived risk. However it does not begin to address the myriad of other factors vital to assessing building value and risk. Such as specific location, age condition of systems, apartment condition and improvements, deferred maintenance, tenant quality, rents and absorption value-add opportunity, etc. These factors help to complete the enterprise valuation.