1. What is Capitalization Rate?

The Capitalization Rate (Cap Rate) is a fundamental metric in real estate that measures the rate of return on a real estate investment property based on the income the property is expected to generate.

2. How Does the Calculator Work?

The calculator uses the Capitalization Rate formula:

Where:

• Net Operating Income — Annual income generated by the property after operating expenses
• Property Value — Current market value or purchase price of the property

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

3. Importance of Capitalization Rate

Details: Cap Rate helps investors compare different real estate investments, assess risk, and estimate potential returns. Higher cap rates typically indicate higher risk but potentially higher returns.

4. Using the Calculator

Tips: Enter the property's annual net operating income and its current market value. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good capitalization rate?
A: This varies by market, but generally 4-10% is typical. Lower rates are common in stable markets, higher rates in riskier markets.

Q2: How does cap rate relate to ROI?
A: Cap rate shows unleveraged return, while ROI accounts for financing. Cap rate is useful for comparing properties independent of financing.

Q3: What's included in net operating income?
A: All income minus operating expenses (property taxes, insurance, maintenance, etc.), but excludes mortgage payments and income taxes.

Q4: When is cap rate not useful?
A: For properties with irregular income (like fix-and-flips) or when future income growth is expected to be significant.

Q5: How does location affect cap rates?
A: Prime locations typically have lower cap rates due to higher property values and perceived lower risk.