1. What is Cap Rate?

The capitalization rate (cap rate) is a fundamental metric in real estate that measures 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:

• \( NOI \) — Net Operating Income (annual income after expenses)
• \( Property Value \) — Current market value or purchase price of property

Explanation: The formula calculates what percentage of the property's value is earned as income each year.

3. Importance of Cap Rate

Details: Cap rate helps investors compare properties, assess risk, and estimate potential returns. Higher cap rates typically indicate higher risk but potentially higher returns.

4. Using the Calculator

Tips: Enter accurate NOI (annual rental income minus operating expenses) and current property value. Both values must be positive numbers in USD.

5. Frequently Asked Questions (FAQ)

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

Q2: How does cap rate differ from ROI?
A: Cap rate doesn't account for financing (cash vs mortgage), while ROI considers your actual cash investment and loan costs.

Q3: Should I always choose the highest cap rate?
A: Not necessarily. Very high cap rates may indicate higher risk, vacancies, or property issues that reduce NOI.

Q4: What expenses are included in NOI?
A: Operating expenses like taxes, insurance, maintenance, and management fees - but not mortgage payments or capital improvements.

Q5: How often should I recalculate cap rate?
A: Recalculate when property values change significantly or when NOI changes due to rent adjustments or expense changes.