What is cap rate?

Accounting Dec 18, 2020

What is cap rate?

Expert Solution

The cap rate, which is short for capitalization rate, allows an investor to estimate how long they will need to own a property before it generates enough money to pay for its acquisition. If an investor is looking at a rental home that is asking for $125,000 and they think they can rent it for around $1250 a month, then the would take the investment amount and divide it by the rent to see that they can expect a cap rate of 100 months or a cap rate of 8.3 years to recover their investment.

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