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 compares the net operating income to the property's market value or purchase price.

2. How Does the Calculator Work?

The calculator uses the cap rate formula:

Where:

• \( \text{Net Income} \) — Annual rental income minus operating expenses (USD)
• \( \text{Property Cost} \) — Purchase price or current market value of the property (USD)

Explanation: The cap rate represents the percentage return an investor would expect to receive on an all-cash purchase of the property.

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 for its income potential.

4. Using the Calculator

Tips: Enter the property's annual net operating income and either its purchase price or current market value. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good cap rate?
A: Typically 4-10%, with higher rates indicating higher potential returns but also higher risk. Ideal rates vary by market and property type.

Q2: How is net income calculated?
A: Gross rental income minus operating expenses (taxes, insurance, maintenance, etc.), but before mortgage payments and income taxes.

Q3: Should I include mortgage payments?
A: No, cap rate calculations should exclude financing costs to allow comparison between properties regardless of financing method.

Q4: How does cap rate relate to ROI?
A: Cap rate shows unleveraged return, while ROI (return on investment) typically includes financing effects and may be higher or lower.

Q5: When is cap rate not useful?
A: For properties with irregular income (fix-and-flips), properties needing significant renovations, or when future income growth is expected.