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 represents the ratio of Net Operating Income (NOI) 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 after expenses)
• \( Value \) — 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 NOI.

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 but potentially higher returns.

4. Using the Calculator

Tips: Enter NOI in USD (annual amount), property value in USD. Both values must be positive numbers. The result is expressed as a percentage.

5. Frequently Asked Questions (FAQ)

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

Q2: How is NOI calculated?
A: NOI = Gross Rental Income - Operating Expenses (excluding mortgage payments and income taxes).

Q3: What are limitations of cap rate?
A: It doesn't account for financing, future income growth, or property appreciation. It's best used for comparing similar properties.

Q4: Should I always choose the highest cap rate?
A: Not necessarily. Higher cap rates often come with higher risks. Consider other factors like location, property condition, and market trends.

Q5: How does cap rate relate to property value?
A: Properties with higher cap rates are generally valued lower relative to their income, while lower cap rates indicate higher valuations.