What is Cap Rate?
Cap rate (capitalization rate) is a crucial real estate metric used to evaluate investment properties. Calculate cap rate to assess potential returns, compare properties, and make informed investment decisions. Our calculator helps investors determine property value, analyze NOI (Net Operating Income), and understand market trends for better commercial real estate investments.
Calculate Cap Rate
Cap Rate Formula
Cap Rate = (Net Operating Income / Property Value) × 100
How to Use the Calculator
To calculate cap rate: 1) Enter annual Net Operating Income (rental income minus expenses), 2) Input current property value or purchase price, 3) Click calculate. The tool instantly computes capitalization rate percentage. Use this metric to compare investment properties, assess risk, and evaluate potential returns in commercial real estate markets.
Cap Rate Calculation Table
| NOI | Property Value | Cap Rate |
|---|---|---|
| $50,000 | $1,000,000 | 5% |
| $75,000 | $1,200,000 | 6.25% |
| $100,000 | $2,500,000 | 4% |
Advantages & Disadvantages
Advantages:
- Quick comparison of investment properties
- Simple calculation for initial evaluation
- Helps assess market value trends
- Useful for commercial property analysis
- Identifies potential investment opportunities
Disadvantages:
- Doesn't consider financing costs
- Ignores future value appreciation
- Not suitable for value-add properties
- Varies by market conditions
- Doesn't account for tax implications
FAQs
What's a good cap rate?
A good cap rate typically ranges 4-10% depending on location and property type. Urban areas often have lower cap rates (4-6%) while rural properties may have higher rates (8-10%). Always compare with local market averages.
Does higher cap rate mean better investment?
Higher cap rates indicate higher potential returns but also greater risk. Lower cap rates suggest stable, lower-risk investments. The ideal rate depends on your investment strategy and risk tolerance.