1. What is the Capitalization Rate?

The capitalization rate (or "cap rate") is a fundamental metric used in real estate to estimate the potential return on an investment property. It compares the net operating income (NOI) a property generates to its current market value.

2. How Does the Calculator Work?

The calculator uses the cap rate formula:

Where:

• Net Operating Income — Annual rental income minus operating expenses
• Property Value — Current market value of the property

Explanation: The cap rate represents the percentage return an investor would expect to receive if they purchased the property with cash.

3. Importance of Cap Rate Calculation

Details: Cap rate helps investors compare different real estate investments, assess risk, and determine if a property is priced appropriately. Higher cap rates typically indicate higher risk properties.

4. Using the Calculator

Tips: Enter the property's net operating income (annual rental income minus expenses) and its current market value. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good cap rate?
A: This varies by market. Generally, 4-10% is common, with higher rates in riskier markets and lower rates in stable markets.

Q2: How does cap rate relate to ROI?
A: Cap rate shows unleveraged return (cash purchase). ROI typically considers financing and may be higher or lower.

Q3: Should I only consider cap rate when evaluating properties?
A: No, cap rate is just one metric. Also consider location, appreciation potential, and property condition.

Q4: Why use annual NOI instead of monthly?
A: Cap rate is an annual metric that standardizes comparison between properties regardless of rental terms.

Q5: How accurate is cap rate for valuation?
A: It provides a quick estimate but doesn't account for future income changes or property improvements.