When dealing with investment asset one will hear the term capitalization rate often. Cap is an abbreviated version of capitalization, which is a way of determining the rate of return on an investment property. In order to calculate, one must know the price of the asset and the net operating revenue which creates the following equation:
Cap rate = Noi / Price of asset or Noi / Cap Rate = Price of Property
Calculate Mortgage Interest
To use a simple example lets say an apartment involved sells for 0,000 (cheap I know, this is an example). The Noi on the asset is ,000. If we plug those two numbers into the equation:
15,000 / 100,000 = 15% rate
But how do we know if this is a good rate of return? The best way to judge how good the rate is, is by reviewing comparable sales' rates. If the similar properties have a lower cap rate then the 15% is a higher than mean rate and could be considered a deal. Capitalization rates are also directly affected by interest rates and assess when they go up or down. Similarly each type of asset and each store has cap rates that differ from distinct asset types and markets. It is best to do enormous research into what type of asset you're looking to spend and what typical financials are for those that are sold in that single store and price point.
Cap rates are just one of many ways to analyze a property, but they are a underlying form of investment determination and should be done on any investment asset to settle if it's worth the request price.
How To reason Cap Rates Calculate Mortgage Interest
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