Most of you who are reading this may already know what a Cap Rate (Capitalisation Rate) is already but surprisingly many don't know exactly what it is or how to calculate it.

It is actually quite easy to calculate and will help you determine quickly if a property makes sense.

Your Cap Rate will show you, if you had no mortgage - exactly how long it would take for your net income to pay for the property at it's purchase price.

For example; if you purchased a property for $1,000,000.
The Net Operating Income is $100,000

If you divide the net operating income by the purchase price; you will see this property has a 10% Cap Rate ($100,000 / $1,000,000 = 10). It would take you 10 years to recapture your purchase price of $1,000,000 from the net income you generate after all expenses.

If the property only generated $50,000 per year; the Cap Rate would be 5% and take 20 years to recapture the purchase price.

Keep in mind; the Net Operating Income does not include debt servicing (your mortgage). For more information on Calculating your Net Operating Income visit the blog about Net Operating Income!