Capitalization rates and NOI

[Skyler Flintall]

Can someone really delve into cap rates, and NOI and how they're related?

I understand the concept but I feel like I’m overthinking it, and I was told by another investor that if you know the cap rate it can help analyze the deal.

[John Warren]

@Skyler Flintall I think the easiest way to understand Cap Rate is that the cap rate is simply your rate of return if you paid all cash for a property.  For instance, a 5 cap simply means that if you purchase an apartment building with no financing involved at all, the building will produce a 5% return after your operating expenses. A 10 cap means that a building will produce a 10% return if purchased "all cash". 

The NOI or net operating income is also a fairly straightforward concept. Again, it does not take into account financing. You take the gross income  and subtract out all of the operating costs and expenses (taxes, insurance, gas, electric, water, trash, lawn, snow, maintenance, CapEx reserves, management, etc). The amount you have left over is your net operating income.

The two concepts are definitely related. To find your cap rate, you simply divide your NOI by your purchase price. Hope this helps!