The Capitalization rate (cap rate) is an important term used in real estate investing. It is calculated by dividing the property’s net operating income by the sale price. Investors use this number to determine whether or not property is worth acquiring.

Cap Rates in Real Estate

Cap rates vary in different areas based on several factors. For instance, you may find a lower cap rate in a more desirable area than you would in one that is less desirable. When looking at rates in this instance, you could almost compare it to that of a seesaw. When a neighborhood is on the decline, the capitalization rates tend to go up. When an area is thriving with working-class residents, low crime rates and steady housing values, the capitalization rate goes down.

Calculating the cap rate and knowing when that number is useful for you takes experience and training. By teaming with a seasoned investor to learn how to invest in real estate, you have a much better chance of making those numbers work for you and earning a full-time income from your investments.

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