1. What is Cap Rate?

The capitalization rate (cap rate) is a fundamental metric used in real estate valuation, representing the ratio of a property's net operating income (NOI) to its current market value. It helps investors assess the potential return on an investment property.

2. How Does the Calculator Work?

The calculator uses the cap rate formula:

Where:

• \( \text{Estimated NOI} \) — Net Operating Income in USD
• \( \text{Zestimate Value} \) — Zillow's estimated property value in USD

Explanation: The formula calculates what percentage of the property's value is earned as income each year.

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 relative to its income potential.

4. Using the Calculator

Tips: Enter the property's estimated annual net operating income and its Zestimate value. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good cap rate?
A: Generally, 4-10% is typical, with higher rates indicating higher risk/return. Ideal rates vary by market and property type.

Q2: How accurate is Zestimate for cap rate calculations?
A: Zestimates provide a starting point but may not reflect current market value. For precise analysis, use professional appraisals.

Q3: What's included in NOI?
A: All operating income minus operating expenses (excluding mortgage payments, depreciation, and capital expenditures).

Q4: Should I use annual or monthly NOI?
A: Always use annual NOI for cap rate calculations.

Q5: How does cap rate differ from ROI?
A: Cap rate shows unleveraged return, while ROI accounts for financing and other investor-specific factors.