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 the property's current market value.

2. How Does the Calculator Work?

The calculator uses the cap rate formula:

Where:

• NOI — Net Operating Income (annual income minus operating expenses)
• Property Value — Current market value or purchase price of the property

Explanation: The cap rate represents the percentage return an investor would expect to receive if they purchased the property with cash (without financing).

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 properties.

4. Using the Calculator

Tips: Enter the property's annual NOI (rental income minus expenses like taxes, insurance, maintenance) and the property's 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, but generally 4-10% is common. Lower cap rates are found in stable markets, higher rates in riskier markets.

Q2: How does cap rate differ from ROI?
A: Cap rate doesn't consider financing costs, while ROI (return on investment) does. Cap rate shows unleveraged return.

Q3: Should I only look at cap rate when evaluating properties?
A: No, cap rate is just one metric. Also consider location, potential appreciation, property condition, and local market trends.

Q4: Why multiply by 100 in the formula?
A: This converts the decimal result to a percentage, which is the standard way to express cap rates.

Q5: How often should I recalculate cap rate?
A: Recalculate whenever NOI changes significantly or property values in your area fluctuate substantially.