Capitalization rate or cap rate is a calculation that investors use to determine the rate of return on a real estate investment. Cap rate is determined by dividing a property’s net operating income by its current market value.
Example: Bob is considering purchasing a storage facility with gross income of $500,000 and operating expenses of $250,000. The purchase price is $1.7 million. The cap rate would be approximately 15% ($500,000 - $250,000 = $250,000/1,700,000 = 14.7%).