What is Cap Rate?
Calculating cap rate (capitalization rate) is essential for real estate investors to evaluate property profitability. This crucial metric helps compare different investment opportunities, assess risk levels, and predict potential returns. By understanding cap rates, investors can make informed decisions about commercial properties, multifamily units, and rental investments. Our calculator simplifies complex real estate math while improving your investment strategy.
Cap Rate Calculator
Cap Rate Formula
Cap Rate = (Net Operating Income / Property Value) × 100
How to Use
Enter the property's Net Operating Income (annual rental income minus expenses) and current market value. Click calculate to instantly get the capitalization rate percentage. Use this metric to compare with similar properties - higher cap rates suggest higher returns but potentially higher risk. Always consider location and market trends.
Calculation Process
- Determine annual gross rental income
- Subtract operating expenses (utilities, taxes, maintenance)
- Divide NOI by property value
- Multiply by 100 to get percentage
Cap Rate Examples
| NOI | Property Value | Cap Rate |
|---|---|---|
| $50,000 | $1,000,000 | 5.0% |
| $75,000 | $1,200,000 | 6.25% |
| $120,000 | $2,000,000 | 6.0% |
Advantages & Disadvantages
Pros:
- Quick comparison of investment properties
- Simple metric for initial evaluation
- Helps identify market trends
Cons:
- Doesn't consider financing costs
- Ignores future value appreciation
- Varies by property type/location