1. What is Cap Rate?

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 expenses)
• \( Property Value \) — Current market value or purchase price

Explanation: The formula expresses the relationship between a property's income and its value as a percentage.

3. Importance of Cap Rate

Details: Cap rate helps investors compare different properties, assess risk (higher cap rates typically indicate higher risk), and determine if a property is priced appropriately for its income potential.

4. Using the Calculator

Tips: Enter the property's annual NOI and current market value in dollars. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good cap rate for multifamily properties?
A: Typically 4-10%, with lower rates in high-demand urban areas and higher rates in riskier markets.

Q2: How does cap rate differ from ROI?
A: Cap rate doesn't account for financing costs, while ROI considers mortgage payments and other financing factors.

Q3: Should I only consider cap rate when evaluating properties?
A: No, it's just one metric. Also consider location, property condition, growth potential, and other factors.

Q4: Why do cap rates vary by location?
A: They reflect market conditions - lower in stable markets with appreciation potential, higher in riskier areas.

Q5: Can cap rate help determine property value?
A: Yes, rearranged formula: Property Value = NOI / Cap Rate can estimate value based on desired return.