What is Cap Rate and Why It Matters
Cap rate (capitalization rate) is a crucial real estate metric used to evaluate investment properties. Learning how cap rate is calculated helps investors assess profitability, compare properties, and make informed decisions. This key performance indicator measures the relationship between a property's net operating income and its market value, providing insight into potential returns.
Cap Rate Calculator
Cap Rate Formula
The capitalization rate formula is: Cap Rate = (Net Operating Income / Property Value) × 100
How to Use This Calculator
To calculate cap rate: 1) Enter annual net operating income (rental income minus expenses) 2) Input current property value 3) Click calculate. Our tool instantly computes the capitalization rate percentage. Use this metric to compare investment properties, assess market value, and evaluate potential returns in commercial real estate investments.
Cap Rate Calculation Process
| Step | Description | Example |
|---|---|---|
| 1 | Determine annual net operating income (NOI) | $100,000 |
| 2 | Find current property market value | $1,500,000 |
| 3 | Divide NOI by property value | 100,000 ÷ 1,500,000 = 0.0667 |
| 4 | Multiply by 100 to get percentage | 6.67% Cap Rate |
Advantages and Disadvantages of Cap Rate
Pros:
- Quick comparison of investment properties
- Measures income-generating potential
- Helps assess market value
- Simple calculation method
- Identifies market trends
Cons:
- Doesn't account for financing costs
- Ignores future value changes
- Not suitable for value-add properties
- Varies by market conditions
- Requires accurate NOI estimation
Frequently Asked Questions
What's a good cap rate percentage?
Ideal cap rates vary by market, but generally 4-10% is considered good. Urban areas typically have lower rates (4-6%) while rural areas may see higher rates (8-10%). Always compare with local market averages.
Does cap rate include mortgage payments?
No, cap rate calculations exclude financing costs. It focuses on property performance before debt, making it useful for comparing properties regardless of financing method.