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What is a Property Cap Rate in Real Estate? - LJ Realty Team

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What is a Property’s Cap Rate in Real Estate?

A Property’s Cap Rate also known as Capitalization rate indicates the Rate of Return that is expected to be generated on an investment property.

Generally, 4% to 10% per year is a reasonable range to earn for your investment property, depending on the area.

An Investor may invest in a property at a 4% cap rate in high-demand (and therefore less risky) areas,

but may not invest in a property at 8% (or even higher) cap rate in low-demand areas.

So now, we want to find out How to Calculate a Cap Rate for a duplex property that is listed on the market for $700,000

First, we need to find out the Net Operating Income.

We take the Total Income (rent collected) minus expenses (property taxes, Insurance, maintenance= Net Operating Income.

For this duplex,

There are two 2 tenants paying $2000 each, total of $4000 per month

$4000x12 months = $48,000 a year income

For Expenses - we will keep it simple with just property taxes and insurance -

Property taxes $10,000 per year

Insurance = $2,000 per year

Total expenses $12,000 per year

$48,000 - $12,000 = $36,000

$36,000 / listing price $700,000 = 5.1% is the cap rate.

If you want Cap Rate to be 6% for this property then the offer price for this property should be $600,000

$36,000/.06 = $600,000

As you can see as the cap rate increase, the price decreases.

As a realtor, you would want to advise your client to go with at least 5-6% cap rate on any investment property.

If you want have questions, feel free to contact us at 516-218-1261

Lucky Lakhwinder Singh

CEO, Co-Owner Licensed Real Estate Broker

LJ Realty Team

127-03 Rockaway Blvd

South Ozone Park, NY 11420

Call or Text 516-218-1261


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