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's calculated by dividing the Net Operating Income (NOI) by the current market value of the property.

2. How Does the Calculator Work?

The calculator uses the Cap Rate formula:

Where:

• \( NOI \) — Net Operating Income (annual income after operating expenses)
• \( Market Value \) — Current market value or purchase price of the property

Explanation: The formula shows 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. Higher cap rates typically indicate higher risk properties.

4. Using the Calculator

Tips: Enter the property's annual Net Operating Income and its current Market Value in USD. Both values must be greater than zero.

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 and growth potential.

Q5: How does cap rate relate to property value?
A: Properties with higher cap rates are generally valued lower relative to their income, indicating potentially higher returns but also higher risk.