Cap Rate Made Simple: Fast Methods & Common Traps
By Khai Tran | Category: CRE | 5 min read
Understanding cap rates does not need to be complicated. You just need a clean formula and a few practical shortcuts. This guide gives you the exact methods I teach agents so you can analyze deals with confidence.
The Basic Formula
Cap Rate = NOI / Property Value
A property with $100,000 NOI valued at $1,000,000 has a 10% cap rate. Higher cap rates generally indicate higher risk or lower-quality properties.
Quick Valuation Shortcut
Property Value = NOI / Cap Rate
If market cap rates are 7% and NOI is $70,000, the property is worth approximately $1,000,000. This lets you quickly estimate value in conversations.
Common Traps to Avoid
Using seller-provided NOI without verification. Forgetting to account for vacancy. Comparing cap rates across different property types or markets. Ignoring deferred maintenance that will eat into actual returns.
When Cap Rate Matters Less
Cap rate is less useful for value-add deals where the goal is to increase NOI. It also matters less for development or repositioning projects. Focus on projected cap rate after improvements.
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