CAP rate

[John Johnson]

I have been looking and reading some posts on here and still don't understand what CAP rate is. Can someone please break this down to me in very simple terms

[Aaron Vergason]

Hey @John Johnson,

Check out what NOI is (Net Operating Income).

http://www.investopedia.com/terms/n/noi.asp

Then get the definition of CAP rate (Capitalization Rate)

http://www.investopedia.com/terms/c/capitalization...

Then you will understand what we are talking about generally. REI's throw around the term loosely sometimes. If I told you I have a duplex and it's a 10 CAP, or the capitalization rate is 10, then you would know that if you bought my duplex with all cash (no financing) you would get your cash back in 10 years. because you would get 10% back each year. If I told you I was selling the house for $100,000 and that it's a 10 CAP, you could expect to make $10,000 before paying a mortgage or having money set aside to pay income tax at the end of the year.

Typically the higher the cap, the more money you could make, but usually it's a more risky property or in a rougher area. High CAP is good if you can mitigate the risks.

Good Luck!