Question:
“What’s a cap rate?”
Answer:
Cap rate is short for “capitalization rate.” Cap rate is the rate an investment property earns money, as a percentage of the value of the property.
It’s similar to an interest rate on a CD. And it’s also your % return if you buy the property for cash.
You calculate cap rate by dividing the net operating income (gross rent minus gross expenses NOT including mortgage) by the value of the property.
For example (using simple round numbers):
- You buy a $200,000 condo
- It rents for $1,000/month, or $12,000/year
- Expenses are $500/month, or $6,000/year
- The net operating income is $500/month, or $6,000/year
- $6,000 NOI divided by $200,000 value = 3% cap rate
Cap rates in San Diego typically run from 3% to 5%.
