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 represents the ratio of Net Operating Income (NOI) to the property's current market value or purchase price.

2. How Does the Calculator Work?

The calculator uses the standard cap rate formula:

Where:

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

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

3. Importance of Cap Rate

Details: Cap rate helps investors compare different real estate investments, assess risk, and determine if a property is priced appropriately. Higher cap rates typically indicate higher risk but potentially higher returns.

4. Using the Calculator

Tips: Enter accurate NOI (all income minus operating expenses but before mortgage payments) and current property value. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

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

Q2: How does cap rate relate to ROI?
A: Cap rate shows unleveraged return, while ROI considers financing. Cap rate is useful for comparing properties regardless of financing.

Q3: Should I always choose the highest cap rate?
A: Not necessarily. Higher cap rates often mean higher risk. Consider property condition, location, and market trends.

Q4: Does cap rate include mortgage payments?
A: No. NOI excludes financing costs, so cap rate represents return before debt service.

Q5: How often should I calculate cap rate?
A: Recalculate when evaluating purchases, refinancing, or when property income/expenses change significantly.