1. What is the Cap Rate Formula?

The capitalization rate (cap rate) is a fundamental real estate metric used to estimate the potential return on an investment property. It is calculated as the ratio of Net Operating Income (NOI) to the property's current market value.

2. How Does the Calculator Work?

The calculator uses the Cap Rate formula:

Where:

• \( NOI \) — Net Operating Income (currency units)
• \( Property Value \) — Current market value of the property (currency units)

Explanation: The cap rate provides a percentage return that investors can expect from a property based on its income generation relative to its value.

3. Importance of Cap Rate Calculation

Details: Cap rate is crucial for real estate investors to compare different investment opportunities, assess risk, and determine appropriate pricing for properties.

4. Using the Calculator

Tips: Enter NOI and Property Value in the same currency units. Both values must be positive numbers, with Property Value greater than zero.

5. Frequently Asked Questions (FAQ)

Q1: What is considered a good cap rate?
A: A "good" cap rate varies by market and property type. Generally, higher cap rates indicate higher potential returns but may also signal higher risk.

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

Q3: What expenses are included in NOI?
A: NOI includes all operating income minus operating expenses (property taxes, insurance, maintenance, utilities), but excludes mortgage payments and income taxes.

Q4: Can cap rate be negative?
A: Yes, if operating expenses exceed rental income, resulting in negative NOI, the cap rate will be negative.

Q5: How often should cap rate be calculated?
A: Cap rate should be recalculated regularly as property values and rental income change over time.