1. What is Capitalization Rate?

The capitalization rate (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:

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

Explanation: The cap rate shows what percentage of the property's value is earned as income each year.

3. Importance of Cap Rate

Details: Cap rate helps investors compare different properties, assess risk, and determine if a property is priced appropriately for its income potential.

4. Using the Calculator

Tips: Enter accurate NOI (rental income minus expenses like taxes, insurance, maintenance) and current property value. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good cap rate?
A: Generally 4-10% is typical, with higher rates indicating higher risk/return. Ideal rates vary by market and property type.

Q2: How does cap rate differ from ROI?
A: Cap rate doesn't consider financing (mortgage) while ROI does. Cap rate evaluates property performance independent of financing.

Q3: When is cap rate most useful?
A: Best for comparing similar properties in the same market or evaluating commercial properties with stable income.

Q4: What are limitations of cap rate?
A: Doesn't account for future value changes, financing costs, or variable income. Not ideal for properties with irregular cash flows.

Q5: Should I only consider cap rate when investing?
A: No, it's just one metric. Also consider cash flow, appreciation potential, location, and your investment goals.