Capitalization Rate (Cap Rate) is a ratio used to estimate the return on investment of a real estate investment property, like an apartment building. It is calculated by dividing the income a property will generate in a given year (after fixed and variable costs) by the purchase price or current value of the property. For example, an apartment building that recently sold for $1,000,000 and generates $100,000 in income after expenses has a capitalization rate of 10%.
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Definition of income property
Property bought or developed to earn income through renting, leasing or price appreciation. Income property can be residential or commercial. Residential income property is commonly referred to as "non-owner occupied". A mortgage for a "non-owner occupied" property may carry a higher interest rate than an "owner occupied" mortgage as it is viewed by lenders as a higher risk.
A common practice during periods of home price appreciation is for investors and speculators to purchase residential income properties with the intent that rents will cover their monthly expenses for a period of time until the property can be sold for a large capital gain. As with all markets during times of fast price appreciation, and as with all market bubbles, those that enter the market first and get out first usually do well. Those that enter the market later, and get out last usually don't do as well.
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