Cap Rate Dummified for commercial property

[Peter Kim]

Just to clarify, in the absolute simplest form, cap rate essential means % return on investment per year. So if it is a cap rate of 3%, you can expect a 3% return on investment per year?

If "yes" is this something you verify by running the numbers yourself?

If "no" please educate me where I am disconnected

[Tim Johnson]

The cap rate (or capitalization rate) is the NOI (net operating income) divided by the purchase price.

While cap rate can give you a hint toward your ROI, it is not generally used to estimate your ROI on any given investment or time frame. Instead, since it leaves out the financing (1 huge variable in your ROI) it is used primarily to make quick comparisons between properties.

It's important to understand average cap rates in any given area, but from there one needs to dig in and add your financing variables, appreciation, and depreciation (tax gain or loss) to get to a more accurate ROI.

And yes, never take the seller's cap rate as truth.... do your own math.