CAP RATE, also known as Capitalization Rate (CAP for short), is a number to determine the return on an investment in the real estate world for income property. Cap rate is determined by taking the NOI (Net Operating Income)(net profit before debt reduction) and dividing it into the asking price of the real estate.

Lets say a person wanted to buy a hotel in Hawaii for $3,000,000 (three million dollars) and the NOI is $300,000 (three hundred thousand). $300k / $3M = 10% CAP. The higher the CAP rate, the more money it makes and better investment it is. So, does that mean you get a 10% return on your money? Well that depends on how much money came out of your pocket to buy the hotel(Cash on Cash return). Most commercial loans require 20% down and some go as low as 10% down. So $300 thousand can buy a $3 million dollar piece of property, that’s called leverage. Now we know how Donald Trump can afford those weird hair styles!