Capitalization rate (cap rate)

[Amy Sommers]

Amy from AL here...what is cap rate? What's a good cap rate and why? What's a bad cap rate and why? 

[Jason Monroe]

What is a cap rate? The capitalization rate, often just called the cap rate, is the ratio of Net Operating Income (NOI) to property asset value. So, for example, if a property was listed for $1,000,000 and generated an NOI of $100,000, then the cap rate would be $100,000/$1,000,000, or 10%.

Cap Rate = Annual Net operating income / cost ( or value)

Most of time class A areas are usually lower and the class C buildings are usually a higher cap rate. 

Class A buildings are more expensive maybe less maintenance, *possibly* less management intensive.

Cap rates vary depending on locality. San Francisco has rent control cap rates are like 3-4.X% you pray for people to leave and you try super hard to evict people for cause. Kansas City Mo has cap rates around 15-20% for 2-4 units and then 6.X-8% for slightly larger multi family.

Phoenix has cap rates of 5.X - 8.X depending on the building class and the area. 

If you're in an area that's trendy where people want to live those buildings are usually more expensive and the cap rates are usually lower.