1. What is Cap Rate?

The capitalization rate (cap rate) is a fundamental real estate metric used to estimate the potential return on an investment property. It represents the ratio of Net Operating Income (NOI) to property asset 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 the property

Explanation: The cap rate provides a percentage return on investment based on the property's income generation relative to its value.

3. Importance of Cap Rate Calculation

Details: Cap rate is crucial for comparing investment properties, assessing risk, determining property value, and making informed real estate investment decisions.

4. Using the Calculator

Tips: Enter accurate NOI and property value figures in the same currency units. Both values must be positive numbers for accurate calculation.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good cap rate?
A: A "good" cap rate varies by market and property type, but typically ranges from 4% to 10%. Higher cap rates generally indicate higher risk properties.

Q2: How does cap rate differ from ROI?
A: Cap rate measures return based on property value only, while ROI (Return on Investment) considers the actual cash invested including financing.

Q3: Should I use purchase price or current value?
A: For investment analysis, use purchase price. For portfolio valuation, use current market value.

Q4: What expenses are included in NOI?
A: NOI includes all operating expenses (property taxes, insurance, maintenance, utilities) but excludes mortgage payments, income taxes, and depreciation.

Q5: Are there limitations to using cap rate?
A: Yes, cap rate doesn't account for financing costs, future income changes, or property appreciation. It's best used as a comparative tool rather than absolute measure.