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 ...