Calculate Cap Rate On Investment Property

Cap Rate Formula:

\[ \text{Cap Rate} = \left( \frac{\text{NOI}}{\text{Property Value}} \right) \times 100 \]

Cap Rate:

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1. What is Cap Rate?

The capitalization rate (cap rate) is a fundamental metric used in real estate to evaluate the potential return on an investment property. It represents the ratio between the net operating income (NOI) produced by a property and its current market value.

2. How Does the Calculator Work?

The calculator uses the cap rate formula:

\[ \text{Cap Rate} = \left( \frac{\text{NOI}}{\text{Property Value}} \right) \times 100 \]

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 gives investors a quick way to compare different investment opportunities by showing the percentage return they might expect from a property in the first year, excluding financing costs.

3. Importance of Cap Rate

Details: Cap rate helps investors assess risk, compare properties, and make informed decisions about potential investments. Higher cap rates typically indicate higher risk, while lower cap rates suggest lower risk and more stable investments.

4. Using the Calculator

Tips: Enter the property's annual net operating income (all income minus operating expenses) and its current market value. Both values must be positive numbers.

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 higher rates in riskier markets and lower rates in stable markets.

Q2: Does cap rate include mortgage payments?
A: No, cap rate calculations exclude financing costs. It measures property performance independent of financing method.

Q3: How does cap rate relate to ROI?
A: Cap rate shows unleveraged return, while ROI (Return on Investment) typically includes financing costs and shows actual cash return on invested capital.

Q4: Why use cap rate instead of cash-on-cash return?
A: Cap rate provides a quick comparison between properties, while cash-on-cash return gives a more complete picture of actual investor returns including financing.

Q5: Can cap rate predict property value?
A: Yes, by rearranging the formula: Property Value = NOI / Cap Rate. This is often used to estimate value when comparable sales are limited.