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What is the Cap Rate?

The cap rate, is the ratio of Net Operating Income (NOI) to property asset value. The cap rate is a fundamental concept in the commercial real estate industry and has numerous use cases. The cap rate formula is:

Cap Rate = Net Operating Income/ Property Asset Value

What is Net Operating Income (NOI)?

Net operating income (NOI) is simply the annual income generated by an income-producing property after taking into account all income collected from operations, and deducting all expenses incurred from operations. Net operating income is unique to the property, rather than the investor. The net operating income formula is as follows:

Net Operating Income = Potential Rental Income - Vacancy and Credit Lossers + Other Income - Operating Expenses