1. What is the Cap Rate?

The capitalization rate (cap rate) is a fundamental metric in real estate investing that measures the potential return on an investment property. It's calculated by dividing the property's net operating income by its current market value.

2. How Does the Calculator Work?

The calculator uses the cap rate equation:

Where:

• \( \text{Rental Income} \) — Annual gross rental income
• \( \text{Expenses} \) — Annual operating expenses (excluding financing costs)
• \( \text{Price} \) — Current market value or purchase price of the property

Explanation: The cap rate represents the percentage return an investor would expect to receive if they paid all cash for the property.

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 annual rental income and expenses in USD, along with the property price. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good cap rate?
A: This varies by market, but generally 4-10% is common. Higher cap rates typically indicate higher risk properties.

Q2: How does cap rate differ from ROI?
A: Cap rate shows unleveraged return (all-cash purchase), while ROI accounts for financing and other factors.

Q3: Should I always choose the highest cap rate property?
A: Not necessarily. Higher cap rates often come with higher risks (location, tenant quality, etc.).

Q4: How often should I calculate cap rate?
A: Recalculate whenever income, expenses, or market values change significantly.

Q5: Does cap rate account for appreciation?
A: No, cap rate only considers current income, not potential future value increases.