Financial modelling terms explained

Cap Rate

The capitalization rate, or cap rate, is an important metric in real estate investing. It's defined as the net operating income of an investment property divided by its value.

What Is a Cap Rate?

The cap rate is a financial metric used to measure the profitability of an investment. It is calculated by dividing the annual net operating income (NOI) by the current market value of the investment. The cap rate can be used to compare the profitability of different investments or to measure the rate of return on an investment.

How Do You Calculate a Cap Rate?

The cap rate is one of the most important metrics in real estate investing. It is a measure of the expected return on a property, and is calculated by dividing the property's annual net operating income by the property's current market value. This metric is used to compare different properties and investment opportunities.

Why Is a Cap Rate Useful?

A cap rate is a useful tool for financial modelling because it provides a measure of the return on a property or investment. It is the rate of return that investors expect to earn on a property, and it is calculated by dividing the expected annual income from the property by the purchase price. This figure can help investors to determine whether a property is a good investment and to compare different properties.

What's the Difference Between a Cap Rate and an Interest Rate?

The cap rate is the expected rate of return on a property, while the interest rate is the rate of return paid on money invested. The cap rate is a function of the interest rate, the expected inflation rate, and the expected appreciation rate.

What is an Example of a Cap Rate?

A cap rate is a measure of a property's expected rate of return and is calculated by dividing the property's net operating income by the property's market value. This metric is used to help investors compare different properties and investments.

An example of a cap rate calculation would be to take a property's net operating income of $100,000 and divide it by the property's current market value of $1,000,000. This would result in a cap rate of 10%.

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