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 compares the property's net operating income to its 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 cap rate shows the percentage return you would expect to receive if you purchased the property with cash.

3. Importance of Cap Rate

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

4. Using the Calculator

Tips: Enter accurate NOI (include all income minus operating expenses but not 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: Generally 4-10% is typical, with lower rates in stable markets and higher rates in riskier markets. The "good" rate depends on location and property type.

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 shows property performance regardless of financing.

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

Q4: How does vacancy affect cap rate?
A: Vacancy reduces NOI, which lowers cap rate. Use realistic vacancy estimates in your NOI calculation.

Q5: Can cap rate be negative?
A: Yes, if expenses exceed income (negative NOI), but this indicates a poor investment that's losing money.