Mathematically, a cap rate is simply:
Net Operating Income, or “NOI” (revenue minus expenses) divided by the Value of the Property.
For example, if you pay $1,000,000 for a building that produces $100,000 of NOI, you’ve paid a 10% cap rate and will expect to earn a 10% unleveraged yield in Year 1, assuming no change in NOI. If that same building produces only $50,000 of NOI, then it was a 5% cap rate.
If you’re more familiar with stock market terminology, then think of a cap rate as an inverse multiple.
Mr. Karsh is CEO and Co-Founder of Streitwise and Tryperion Holdings.
Prior to forming Streitwise, Mr. Karsh was an Acquisitions Analyst for Canyon Capital Realty Advisors and the Canyon-Johnson Urban Funds, where he was responsible for underwriting, structuring and executing value-add and opportunistic transactions. He holds a Bachelor of Arts degree in Political Science from the University of Pennsylvania. Mr. Karsh is a member of ULI and is also a Real Estate & Construction member of the Jewish Federation of Greater Los Angeles.