1. What is Capitalization Rate?

The capitalization rate (cap rate) is a fundamental metric in real estate that measures 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 rates help investors compare different properties, assess risk, and estimate potential returns. Higher cap rates typically indicate higher risk properties, while lower cap rates suggest more stable investments.

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: This varies by market. Generally, 4-10% is common, with 5-8% being typical for many markets. Higher cap rates indicate higher risk.

Q2: How does cap rate differ from ROI?
A: Cap rate doesn't consider financing, while ROI factors in mortgage payments and leverage. Cap rate evaluates the property itself, not the investment strategy.

Q3: Should I always choose the highest cap rate property?
A: Not necessarily. Higher cap rates often come with higher risks (vacancy, maintenance, location issues). Consider both cap rate and property condition/location.

Q4: How does property type affect cap rates?
A: Different property types (residential, commercial, industrial) have different typical cap rates. Compare similar property types when evaluating.

Q5: Can cap rate help determine property value?
A: Yes, rearranged formula: Property Value = NOI / Cap Rate. Used when you know market cap rates and property's NOI.