Cap Rate Calculator

Cap Rate Formula:

\[ \text{Cap Rate} = \frac{\text{NOI}}{\text{Property Value}} \times 100\% \]

Cap Rate:

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1. What is Cap Rate?

Cap Rate (Capitalization Rate) is a fundamental real estate metric used to estimate the potential return on an investment property. It represents the ratio of Net Operating Income (NOI) to property value, expressed as a percentage.

2. How Does the Calculator Work?

The calculator uses the Cap Rate formula:

\[ \text{Cap Rate} = \frac{\text{NOI}}{\text{Property Value}} \times 100\% \]

Where:

\( NOI \) — Net Operating Income in dollars
\( Property\ Value \) — Market value or purchase price of the property in dollars

Explanation: The formula calculates the percentage return an investor might expect on a real estate investment, excluding financing costs.

3. Importance of Cap Rate Calculation

Details: Cap Rate is crucial for comparing different investment properties, assessing risk, and making informed investment decisions. Higher cap rates typically indicate higher potential returns but may also suggest higher risk.

4. Using the Calculator

Tips: Enter accurate NOI and property value figures in dollars. Both values must be positive numbers to calculate a valid cap rate.

5. Frequently Asked Questions (FAQ)

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

Q2: How does cap rate relate to property value?
A: Cap rate is inversely related to property value - as cap rates decrease, property values typically increase, and vice versa.

Q3: What's included in NOI?
A: NOI includes all rental income minus operating expenses (property taxes, insurance, maintenance, utilities), but excludes mortgage payments and income taxes.

Q4: Are there limitations to using cap rate?
A: Yes, cap rate doesn't account for financing costs, future income growth, or property appreciation. It's best used for comparing similar properties in the same market.

Q5: Should cap rate be the only metric for investment decisions?
A: No, investors should also consider cash flow, ROI, IRR, and other metrics alongside cap rate for a comprehensive investment analysis.