Question

•A broker presents you with the opportunity to buy an office building that will generate $100,000 in NOI in the first year after you buy it. He says that the building can be bought for $2 million.

•What is the purchase (“going-in”) cap rate?

•Is this a good investment?

Answer 1

The cap rate or capitalization rate is calculated by dividing the the property's Net Operating Income (NOI) by its purchase price.
Here,
NOI = $100,000
Purchase price = $2000000

Cap rate = 100000 / 2000000
             = 0.05
             = 5%
Cap rate = 5%

I don't think this is a good investment as the capitalization rate of 5% would take 20 years to recover the cost of the property. Even a cap rate of 5% is low and one should focus on higher cap rate to churn better returns.