What's a "Cap Rate?

"

If you've been poking around the Business Sales industry for very long, you understand
that we have a jargon of our own. Mixing business, finance, and legal terms, it can seem
disconcerting for some. "Cap Rate" is a term I often get question about. It's really pretty
simple.

Cap Rate = The rate of return on a real estate investment property based on the anticipated
income that the property will generate. Capitalization rate is used to estimate the investor's
potential return on his or her investment.
Formulaically:

Capitalization Rate = Yearly Income/Total Value

What is the cap rate actually telling you? One way to think about the cap rate intuitively is
that it represents the percentage return an investor would receive on an all cash purchase.
Cap Rate is simply the inverse of a sale multiple.
If your sale multiple is 4X, your cap rate is 25%.