Thank you for your question. A capitalization rate ("cap rate") is calculated by dividing the Net Operating Income ("NOI", basically cash flow) by the purchase price/property value. It gives an effective yield on the investment based on what you pay for it. Many investors then use a combination of financial and operational strategies to further maximize their actual yield/investment return. Operational Strategy: adding tenants in an office building after it is acquired to improve the NOI, which will then improve the calculated yield on whatever purchase price was paid to acquire it (increased cash flow/original purchase price). Financial Strategy: using debt to finance the property acquisition ("leverage"), which can improve the effective yield on equity (cash flow of property/equity amount). I am happy to discuss with you further. You can reach me directly via my profile.
Questions & answers
How is the cap rate calculated?
As a Chinese PE fund with $75 million to invest – ideally in New York City or San Francisco – we are looking at commercial office properties to mark our first investment into North America. How is the capitalization rate calculated?
I don’t think there is any difference than calculating cap rate in China real estate deals.