What is Cap Rate Calculation?
Cap rate calculation helps investors evaluate real estate profitability by comparing net operating income (NOI) to property value. This crucial metric (expressed as a percentage) enables quick comparison between investment properties, assessing risk and potential returns. Investors use capitalization rates to make informed decisions in commercial real estate, multifamily properties, and rental investments.
Cap Rate Calculator
What is Cap Rate Calculation?
Cap rate calculation helps investors evaluate real estate profitability by comparing net operating income (NOI) to property value. This crucial metric (expressed as a percentage) enables quick comparison between investment properties, assessing risk and potential returns. Investors use capitalization rates to make informed decisions in commercial real estate, multifamily properties, and rental investments.
Cap Rate Formula
Cap Rate = (Net Operating Income / Property Value) × 100
How to Use This Calculator
Enter the property's annual Net Operating Income (rental income minus expenses) and current market value. Click calculate to get the capitalization rate percentage. Use this rate to compare with similar properties - higher rates suggest better returns but potentially higher risk. Always consider location and market trends.
Calculation Process
| Step | Description |
|---|---|
| 1 | Calculate Annual Net Operating Income (NOI) |
| 2 | Determine Current Property Value |
| 3 | Divide NOI by Property Value |
| 4 | Multiply by 100 to get percentage |
Advantages & Disadvantages
✅ Advantages:
- Quick Comparison: Enables rapid evaluation of multiple properties
- Risk Assessment: Higher cap rates often indicate higher risk properties
- Market Insight: Reflects local real estate market conditions
- Investment Strategy: Helps identify value-add opportunities
- Debt Analysis: Assists in evaluating financing options
❌ Disadvantages:
- Future Projections: Doesn't account for future value changes
- Financing Ignored: Excludes mortgage and financing costs
- Property Specifics: Overlooks unique property features
- Market Volatility: Sensitive to market fluctuations
- Expense Accuracy: Relies on precise NOI calculation