cap rate
Cap Rate is the percentage that tells you how much a property earns yearly compared to its price, a quick way to check if the rent justifies the cost.
In plain English
Here is a mistake many people make when they hear a landlord in Lekki or Milton Keynes say a property is a good investment. They hear the rent figure, they get excited, and they buy without asking the one question that actually matters. That question is simple. How much does this property earn every year compared to what it costs to buy?
That is exactly what cap rate answers. Short for capitalisation rate, it is a percentage you get by dividing the yearly income a property brings in, after paying running costs like agency fees and maintenance, by the price you paid for the property. It strips away the excitement and gives you a plain number to compare one property against another.
Say a friend in Abuja is selling a duplex for ₦40,000,000, and after service charge, repairs and agent fees, it brings in ₦4,000,000 a year in rent. Divide 4,000,000 by 40,000,000 and you get a cap rate of ten percent. Now compare that to another property that costs ₦60,000,000 but only nets ₦3,000,000 a year, a cap rate of five percent. The first one is working harder for your money, even though it costs less.
A Nigerian in London sending money home to buy a rental property in Port Harcourt should ask the agent for this figure before wiring anything. Landlords rarely volunteer it because a low cap rate calmly tells you that you are overpaying for the income the property produces.
Cap rate is not the whole story. It ignores mortgage repayments, and it can be affected by how honestly the seller reports income and expenses. Use it as a first filter, not the final word.
A block of flats in Enugu is listed for ₦25,000,000 and brings in ₦3,000,000 a year in rent after expenses. Cap rate equals 3,000,000 divided by 25,000,000, which is twelve percent, a strong number worth investigating further.
Questions people ask
What counts as a good cap rate in Nigeria?
There is no fixed rule, but many investors look for figures between eight and twelve percent for residential property, adjusting for the area, the state of the building and how reliable the tenants are.
Does cap rate include mortgage repayments?
No, it looks purely at the property's income against its price, before any loan repayments are subtracted, so two buyers with different mortgages on the same property would still calculate the same cap rate.
Can cap rate be manipulated by a seller?
Yes, a seller can inflate the income figure or underreport expenses to make the property look more profitable, which is why it helps to verify the numbers yourself before relying on the one given to you.
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