Also known as “cap-rate”, this is the relationship of a properties net operating income (NOI) and value. The cap-rate does not take into account any debt service, rather it represents the rate of return if the property is purchased with all cash. The cap-rate should be compared with the rates of similar properties in the same neighborhood to make an informed decision.
To calculate: NOI / Value (asking price or purchase price) = Cap-Rate
Example: A building with an asking price of $1,000,000 and a net operating income of $90,000 has a cap-rate of 9% (90000 / 1000000 = .09).