June 14, 2005 -- Investors tend to compare apples to apples.  However, this can be difficult when making an investment decision among several properties. The capitalization rate (cap rate) may help. 

The calculation of the cap rate is an essential tool used to estimate and compare the values of rental properties.  Sometimes it is stated as the number of years to recoup the property’s cost in net rental income.

In order to calculate the cap rate, first determine Net Operating Income ( NOI ).  NOI is the property’s net income before depreciation and interest. Next, divide the NOI by the asking price. For example, if you know that the market value for a piece of property is $3,400,000 and the NOI is $239,000 then:  $239,000 / $3,400,000 = 7%

This cap rate of 7% represents the annual return before mortgage payments and depreciation on the investment of $3,400,000.  If you were investing today, 7% is pretty good, relative to the current market, but not compared to past market cycles.

For more information on cap rates, call Mike Byrnes at 215-564-1900 .           

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