Investment Property – What is Cap Rate

The right evaluation is critical in buying your next investment property. There are many different formulas and calculations that you can use to evaluate potential investment properties. Today we look at Capitalization Rate (Cap Rate).

Cap rate calculates the Return On Investment (ROI) relative to the purchase price. Specifically, the Net Operating Income (NOI) before financing is divided by the purchase price. This will give us a percentage which we can compare to market cap rates for the area. We want to see a cap rate higher than the market cap rate.

For example, if we calculate a cap rate of 8.2% (for a specific property that we are looking at) and the market cap rate for the area is 6.4%, then this property might be a good investment.

The purpose of this calculation is to determine if we are buying the property at a good price.

Contact Us

For more information on this calculation and analyzing investment properties, contact your local Ajax Mortgage Broker, Sean Stewart at 905-427-9596 or sean@seanastewart.com