Budding real estate investors may come across a term at some point called “cap rate”, which isn’t as intimidating as it sounds. In fact, the cap rate is quite simple. At its essence, the cap rate refers to the ratio of a property’s income over its value or cost. It is a method of measuring the return rate for a property that produces income such as a rental, for instance.

You could think of the cap rate as something of the annual yield. To calculate it, it’s largely a matter of dividing the net operating income with the market cost or value. What is the net operating income? This is the total annual income a property yields after expenses and vacancy. Think of it like gross rent with the expenses subtracted.

To determine annual gross rent, begin by taking into account what the subject property can potentially generate in an ideal scenario if occupancy remained at 100% at all times. You would then subtract the anticipated rate of vacancy. For example, if a property could generate a maximum of $10,000 per year, but we expect it to have a vacancy rate of 10%, then the most it can actually generate each year is $9,000.

This update is by Florida hard money lender Monroe Funding Corporation, a direct equity lender serving clients throughout Central and South Florida. We specialize in first mortgages on non-owner occupied residential and commercial property investments as well as real estate loan options. Our fast and flexible loan programs get you to the closing table quickly and professionally. For more information on hard money loans Miami, please call 954-816-0388 or fill out our application.