1. What is Cap 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 minus operating expenses)
• \( Property Value \) — Current market value or purchase price of the property

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

3. Importance of Cap Rate

Details: Cap rate helps investors compare different properties, assess risk, and estimate potential returns. Higher cap rates typically indicate higher risk but potentially higher returns.

4. Using the Calculator

Tips: Enter accurate NOI (all income minus all operating expenses except 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 lower rates in stable markets and higher rates in riskier markets.

Q2: How does cap rate differ from ROI?
A: Cap rate doesn't consider financing, while ROI accounts for mortgage payments and loan terms.

Q3: Should I always choose the property with highest cap rate?
A: Not necessarily. Higher cap rates often come with higher risks. Consider other factors like location and growth potential.

Q4: How often should I calculate cap rate?
A: Recalculate whenever NOI or property value changes significantly - typically annually for ongoing analysis.

Q5: Can cap rate be negative?
A: Only if NOI is negative, which would indicate the property is losing money operationally.