What Is The Apartment Cap Rate?
The Cap rate or the Capitalization rate for an Apartment is defined as the ratio of the Net Operating Income ( NOI ) to the total asset value of the Apartment. This is one of the most fundamental metrics that is applied to any sale of property in the commercial real estate industry and is expressed in percentage values.
The Cap rate for an apartment can be found using the following formula of
Cap Rate = ( Net Operating Income ) divided by ( the value of the Apartment)
The significance of the Cap rate is that it represents the percentage return an investor in an Apartment would get on an all-cash purchase. It is also taken as a representation of the Price / Earnings multiple is usually the valuation multiple of the apartment goes down when the cap rate for the same goes up.
When you are selling your Apartment the cap rate for it must be low as it signifies a higher value for your property and if you are buying an apartment it must be high as it indicates that you are buying an apartment that has higher asset value. Thus take note of the Apartment Cap rate when you are buying or selling your Apartment.