1. What is Cap Rate?

The capitalization rate (cap rate) is a fundamental metric used in commercial real estate to estimate the potential return on an investment property. It represents the ratio of Net Operating Income (NOI) to the 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)
• \( Value \) — 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 make informed investment decisions. Higher cap rates typically indicate higher risk properties.

4. Using the Calculator

Tips: Enter NOI in dollars (annual amount), property value in dollars. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

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

Q2: How does cap rate relate to ROI?
A: Cap rate gives a quick estimate of unleveraged return. Actual ROI may differ based on financing terms and other factors.

Q3: What's included in NOI?
A: All operating income minus operating expenses (but excludes capital expenditures, debt service, and income taxes).

Q4: When is cap rate not useful?
A: For properties with irregular income streams, value-add properties, or when future income growth is expected.

Q5: How does location affect cap rates?
A: Prime locations typically have lower cap rates (higher prices) while secondary markets have higher cap rates.