Understanding Cap Rate

[Travis Oneill]

16 Unit apartment building for sale

Price $825,000 at a 8.83% Cap Rate in Waterbury , CT

Please can anyone confirm for me.

Cap Rate is basically a fancy way of saying salary ?

Salary = Cap Rate x Purchase Price

Salary = 8.83% x 825,000

Salary = 72,847

Is this right ? Thanks!

[Jim K.]

Originally posted by @Russell Brazil:

Cap Rate Equals Net Operating Income Divided by the Property Value 

Net Operating Income is Gross Rents Minus Operating Expenses. (Repairs, Utilities, Insurance.....not mortgage, not capital expenditures)

It is an easy way to create an apples to apples comparison of the risk involved in an asset and market. For instance a Class A brand new construction Property in a primo location is going to have a very low cap rate to reflect the low risk of the asset. A class C or D building in a not good area will have a high Cap Rate, to reflect the higher risk in the asset.

In your example, the NOI is $72k per year. Gross rents are probably someplace close to double that amount in the $140k range. I can also deduce this is probably a Class C or D Property most likely just from the advertised cap rate.

Well, at that price, this is probably not in a "Motive Unclear in Local Slaying" kind of neighborhood. You've got to get down below $25K per apartment for that sort of fun real estate buying adventure.