What is Cap Rate?
The capitalization rate (cap rate) is a fundamental real estate metric used to evaluate investment properties. By calculating cap rate, investors can compare different properties, assess risk levels, and predict potential returns. This crucial calculation helps determine a property's value based on its net operating income, making it essential for commercial real estate analysis, property valuation, and investment decision-making.
Cap Rate Calculator
Cap Rate Formula
The capitalization rate formula is derived from basic income property valuation principles: Cap Rate = (Net Operating Income / Property Value) × 100. This formula evolved from traditional real estate appraisal methods where investors needed a quick way to compare different investment opportunities without complex financial modeling.
How to Use This Calculator
Enter your property's annual net operating income (NOI) and current market value. Our advanced algorithm instantly computes the capitalization rate using industry-standard formulas. Compare results across multiple properties, analyze investment potential, and make data-driven real estate decisions with confidence.
Cap Rate Calculation Table
| Component | Description | Example Value |
|---|---|---|
| NOI | Annual Net Operating Income | $100,000 |
| Property Value | Current Market Value | $1,500,000 |
| Cap Rate | (NOI/Value) × 100 | 6.67% |
Advantages & Disadvantages
- Advantages: Quick comparison tool, standardized metric, measures income potential, identifies market trends, requires minimal inputs
- Disadvantages: Doesn't account for financing, ignores future value changes, varies by market conditions, not suitable for value-add properties, depends on accurate NOI
Frequently Asked Questions
What's a good cap rate for rental properties?
Ideal cap rates vary by market, but generally 4-10% is considered good. Urban areas typically have lower rates due to higher property values, while rural areas may offer higher cap rates with increased risk.
How does cap rate affect property value?
Higher cap rates indicate higher returns but often correlate with higher risk. Lower cap rates suggest premium properties in stable markets. Investors use this metric to assess risk-reward ratios in real estate investments.