1. What is the Cap Rate Formula?

The capitalization rate (cap rate) is a fundamental metric used in real estate to estimate the potential return on an investment property. It compares the net operating income (NOI) a property generates to its current market value.

2. How Does the Calculator Work?

The calculator uses the cap rate formula:

Where:

• NOI — Net Operating Income (annual income after operating expenses)
• Property Value — Current market value or purchase price of the property

Explanation: The formula calculates what percentage of the property's value is earned each year as net income.

3. Importance of Cap Rate Calculation

Details: Cap rate helps investors compare different real estate investments, assess risk, and determine if a property is priced appropriately for its income potential.

4. Using the Calculator

Tips: Enter accurate NOI (annual rental income minus operating expenses) and current property value. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good cap rate?
A: Typically 4-10%, but varies by market and property type. Higher cap rates indicate higher potential returns but often come with higher risk.

Q2: How does cap rate differ from ROI?
A: Cap rate doesn't consider financing costs, while ROI (return on investment) accounts for mortgage payments and other financing factors.

Q3: Should I always choose the property with the highest cap rate?
A: Not necessarily. Higher cap rates may indicate riskier properties or locations. Consider other factors like location, growth potential, and property condition.

Q4: How does property type affect cap rate?
A: Different property types (residential, commercial, industrial) typically have different average cap rates based on their risk profiles.

Q5: Can cap rate be negative?
A: Only if NOI is negative (expenses exceed income), which indicates the property is losing money.