1. What is Cap Rate?

The capitalization rate (cap rate) is a fundamental metric in real estate that measures the rate of return on an investment property based on the income it generates. It helps investors compare different real estate investment opportunities.

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 cap rate represents the percentage return an investor would expect to receive if they purchased the property all-cash.

3. Importance of Cap Rate

Details: Cap rate is crucial for assessing investment potential, comparing properties, and determining appropriate pricing. Higher cap rates typically indicate higher risk/return properties.

4. Using the Calculator

Tips: Enter the property's annual NOI and current market value. Both values must be positive numbers. The calculator will output the cap rate as a percentage.

5. Frequently Asked Questions (FAQ)

Q1: What is a good cap rate?
A: This varies by market and property type. Generally, 4-10% is common, with lower rates in stable markets and higher rates in riskier markets.

Q2: Does cap rate include financing?
A: No, cap rate is calculated before financing costs as it measures the property's inherent return, not the leveraged return.

Q3: How does cap rate relate to property value?
A: All else being equal, properties with higher cap rates are valued lower (higher yield = lower price).

Q4: What are the limitations of cap rate?
A: It doesn't account for future income growth, financing, or capital improvements. Best used with other metrics.

Q5: Should I always choose the highest cap rate property?
A: Not necessarily. Higher cap rates often come with higher risks. Consider location, tenant quality, and growth potential too.