1. What is Cap Rate?

The capitalization rate (cap rate) is a fundamental metric in real estate that measures the expected 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 cap rate represents the percentage return an investor would expect to receive if they paid all cash for the property.

3. Importance of Cap Rate

Details: Cap rates help investors compare properties, assess risk (higher cap rates typically mean higher risk), and make informed investment decisions. They're also used to estimate property values.

4. Using the Calculator

Tips: Enter accurate NOI (all income minus operating expenses but before financing costs) and current property value. Both values must be greater than zero.

5. Frequently Asked Questions (FAQ)

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

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 indicate higher risk. Consider property condition, location, and growth potential too.

Q4: What expenses are included in NOI?
A: All operating expenses (taxes, insurance, maintenance, utilities) but not mortgage payments, capital expenditures, or depreciation.

Q5: Can cap rates change over time?
A: Yes, as NOI and property values fluctuate. Market conditions also affect typical cap rates for an area.