We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is a Cap Rate?

Malcolm Tatum
By
Updated: May 17, 2024
Views: 8,678
Share

Also known as a capitalization rate, the cap rate is a discount rating that is used to determine the current or present value of the accumulated assets that will create future earnings. Utilized in both projecting revenue for a business over a period of time and in evaluating the rate of return on a mortgage, the cap rate normally is calculated income taxes are extracted net income. The cap rate is generally determined by dividing the net operating income associated with the enterprise by the market value times one hundred.

Calculating the current cap rate is an excellent means of ensuring that the business or investment is actually continuing to yield a return. In the best of circumstances, the hope is that the cap rate will demonstrate a relatively risk free return and possibly even a premium over time. However, the cap rate can also be used as an indicator that the investment has some potential problems. When the cap rate does not demonstrate a rate of return that is considered equitable, an investor can choose to pass on the investment and seek a different opportunity.

The business can also benefit from the calculation of cap rates. If the cap rate does not indicate a strong performance, then the owners and managers of the corporation can examine the factors involved. This can lead to making important changes that can help the corporation to improve the bottom line and thus make an impact on the net operating income. Improved performance will also help the overall market value of the company.

As a simple ratio that is used to create an estimate of the value of revenue producing entities, the cap rate is valuable as a means of helping a company improve the bottom line. At the same time, the cap rate serves as an excellent source of information for an investor, making it possible to identify opportunities that carry a lower risk to a capital investment.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

Editors' Picks

Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
Share
https://www.wisegeek.net/what-is-a-cap-rate.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.