Capitalization rate, or cap rate, is widely used by real estate investing practitioners. What is cap rate? Cap rate is the rate at which you discount future income to determine its present value.

But it will help not to get hung up on its technical definition and simply regard cap rate in this way: the relationship between a property’s net operating income and its value. In other words, capitalization rate expresses what percentage rate a property’s net operating income is to its value.

There is no one ideal cap rate; capitalization rates vary from area to area and from investor to investor. The cap rate for an apartment complex in Los Angeles, for instance, would not be expected to be the same as it would be in Seattle, or that one capitalization rate would satisfy the investment goal of all real estate investors.

Moreover, cap rate alone doe not provide a true picture of a property’s profitability and is not generally used apart from other criteria to make real estate investment decisions. Read the entire article… or watch the video How to Calculate Cap Rate…