Cap rate is a capitalization rate (hence the abbreviation "Cap"), which calculates the value of a property, based on their ability to contribute to their own capital. Another definition is the percentage seen as factor (100% = 1.00, 10% = 0.10 and 1% = 0.01) each property produces or "re-pay" itself annually.
The formula involves the capitalization rate, known as IRV formula because it has only three values: I = Income, R = Rate (in this case Cap Rate) and V = Value.
The formula has three different functions: Calculate the value, if it has annual income (they are always annualized rates) and the Cap Rate: V = I / R; calculates the income, if you have the value and the Cap Rate: I = VXR; calculates the Cap Rate, if it has value and income: R = I / V.
There are two types of capitalization rates, gross and net. The gross rate considers all income of a property; your gross income, while net rate, consider EBITDA. It is always good to distinguish between the two because they are different. It is always advisable to clarify which is being talked about. As for the rate of net capitalization; and works with EBITDA, it is necessary to subtract from income: Operating expenses (administration, insurance, fees, property taxes etc.) and costs (maintenance costs, reserves for occasional Capex CAPEX and higher, etc.).
There are investors who quickly calculate the IRV using the current income of the property; but the right way to do this is by using the revenue for next year. To do this you must know the annual percentage revenue growth. If you don't have it, you must use an inflacional increase since it is assumed that revenues are based on leases and they are staggered.
It is important to consider whether the space is fully rented or not. To a partially leased property, IRV formula should be modified and assume that space will come at some point to have an economic occupation of about 90%. If the property has higher vacancy, you must adjust the IRV formula.
Remember that the capitalization rate is inversely proportional to the amount of the bid, the value or price. Best properties, have lower rates of capitalization and vice versa. Capitalization rates can also be viewed as the number of years of return. Convert a capitalization rate to years of repayment is the result of dividing one between the rate.