In Business, what is a 'Cap Rate'?

I see that term all the time. I was just wondering what it is. I see ads for commercial property that say "13% Cap Rate!, Great Buy!"

How is a cap rate determined? Whats a good cap rate?

Cap rate is "Capitalization Rate." It's the Net Operating Income divided by the Market Value, times 100.

Basically it's a way to estimate the value of the property and its profits, without factoring in inflation. The end number doesn't include taxes and stuff, though, you'd still have to deduct that.

By the way, it only applies to commercial buildings, not residential; hence the Net Operating Income.

so if I had a business that was doing $21,000 in revenue, and had $9,000 in expenses including my property insurance, and taxes but not including my debt service, what would be my cap rate?

The value of the property is $1,350,000.

Would that be a cap rate of like 88? That doesnt sound right.

Wow Letizia - do you have a business background? There are so many smart people here.

I think it'd be more like 1.5%. I'm a bit rusty on this, but $21,000 sounds a bit low no matter how much the property costs.

And Angela Marie, I don't really have a business background, per se, but I'm a Poli Sci and Business Administration double-major... the only reason I know this stuff is because I took a Real Estate Law class last quarter (which also explains why I'm a bit rusty on the actual calculation of it ).

A Caprate is an increment with which somebody's likingness to Capo de La Cosa Nostra is measured.

Mick

Assuming your net income $12,000 the cap rate would be roughly 0.9%. Are we talking $12,000 per year?! That doesn't sound right. I think you're better off by selling it and put your money in the bank, they at least give you 4% profit.

So would it be better to have a high, or a low, ratio in that case?

those figures were monthly not yearly.

So your net income would be $144,000 per year and the caprate would be 10.7%.