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What Every Real Estate Investor Needs to Know About Cash Flow... And 36 Other Key Financial Measures, Updated Edition, 2nd Edition by Frank Gallinelli

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CHAPTER 16Calculation 10: Capitalization Rate

What It Means

Capitalization rate (or cap rate, as it is more commonly called) is the rate at which you discount future income to determine its present value. For a related measure, see also net income multiplier (Part II, Calculation 11).

In practice, you will typically use cap rate to express the relationship between a property’s value and its net operating income (NOI) for the current or coming year.

You can use the cap rate formula, discussed below, to serve three useful purposes:

1.  Obviously, you can use it to calculate a property’s cap rate. You’ll want to do so when you know its NOI and what is presumably its value—probably a seller’s asking price. What you’re really doing in this situation ...

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