1. What Is The Cap Rate?

The capitalization rate (cap 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 asset value.

2. How Does The Calculator Work?

The calculator uses the cap rate formula:

Where:

• \( NOI \) — Net Operating Income ($)
• \( Property Value \) — Current market value or purchase price of the property ($)

Explanation: The cap rate expresses the percentage return an investor might expect on an all-cash purchase of the property, without considering financing.

3. Importance Of Cap Rate Calculation

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

4. Using The Calculator

Tips: Enter NOI and Property Value in dollars. Both values must be positive, with Property Value greater than zero for accurate calculation.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good cap rate?
A: Good cap rates vary 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 and property value have an inverse relationship. As cap rates decrease, property values typically increase, and vice versa.

Q3: What's the difference between cap rate and ROI?
A: Cap rate measures return based on property value alone, while ROI (Return on Investment) factors in financing costs and leverage.

Q4: Should I use market value or purchase price?
A: For investment analysis, use current market value. For acquisition decisions, use purchase price to calculate going-in cap rate.

Q5: What are the limitations of cap rate?
A: Cap rate doesn't account for financing costs, future income growth, property improvements, or changes in market conditions.