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 after expenses)
• \( Property Value \) — Current market value or purchase price

Explanation: The formula calculates the percentage return you would expect to receive if you purchased the property with cash.

3. Importance of Cap Rate Calculation

Details: Cap Rate helps investors compare different real estate investments, assess risk, and determine if a property is priced appropriately for its income potential.

4. Using the Calculator

Tips: Enter the property's annual NOI in USD and its current market value in USD. Both values must be positive numbers.

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 higher rates indicating higher potential returns but often higher risk.

Q2: How does Cap Rate differ from ROI?
A: Cap Rate doesn't consider financing costs, while ROI (Return on Investment) accounts for mortgage payments and other financing factors.

Q3: Should I only look at Cap Rate when evaluating properties?
A: No, Cap Rate is just one metric. Also consider location, property condition, growth potential, and your investment goals.

Q4: Why multiply by 100 in the formula?
A: This converts the decimal result to a percentage, which is the standard way Cap Rates are expressed.

Q5: Can Cap Rate be negative?
A: In theory yes (if NOI is negative), but this would indicate a property losing money, which is generally not a viable investment.