Capitalization Rate (Cap Rate) Calculator
What is Capitalization Rate (Cap Rate)?
The Capitalization Rate, or Cap Rate, is a key metric used in commercial real estate to estimate the potential return on investment for a property. It represents the ratio between a property's Net Operating Income (NOI) and its market value (or purchase price). Essentially, it tells you what percentage of your investment you can expect to earn back in a year, before considering financing costs.
How to Calculate Cap Rate:
The formula for calculating the Cap Rate is straightforward:
Cap Rate = (Net Operating Income / Property Value) * 100
- Net Operating Income (NOI): This is the property's annual gross income minus all operating expenses. Operating expenses include property taxes, insurance, property management fees, utilities, repairs, and maintenance. Crucially, NOI does NOT include mortgage payments (principal and interest) or depreciation, as these are financing and tax-related costs, not operational ones.
- Property Value: This is the current market value of the property or the price at which it is being considered for purchase.
Interpreting the Cap Rate:
A higher Cap Rate generally indicates a potentially higher return on investment relative to the property's value, but it can also signify higher risk. Conversely, a lower Cap Rate might suggest a lower immediate return but potentially a more stable or less risky investment. Investors use Cap Rates to compare different investment opportunities and to assess the profitability of a real estate asset. It's important to compare Cap Rates within similar property types and geographic locations, as market conditions significantly influence these figures.
Example Calculation:
Let's say you are considering purchasing an office building.
- The building is projected to generate $75,000 in Net Operating Income (NOI) annually.
- The current market value of the building is assessed at $1,200,000.
Using the Cap Rate formula:
Cap Rate = ($75,000 / $1,200,000) * 100
Cap Rate = 0.0625 * 100
Cap Rate = 6.25%
This means the investment is expected to yield a 6.25% return on its value annually, before considering any financing.
function calculateCapRate() {
var noiInput = document.getElementById("netOperatingIncome");
var propertyValueInput = document.getElementById("propertyValue");
var resultDiv = document.getElementById("result");
var noi = parseFloat(noiInput.value);
var propertyValue = parseFloat(propertyValueInput.value);
if (isNaN(noi) || isNaN(propertyValue)) {
resultDiv.innerHTML = "Please enter valid numbers for both fields.";
return;
}
if (propertyValue <= 0) {
resultDiv.innerHTML = "Property Value must be greater than zero.";
return;
}
if (noi < 0) {
resultDiv.innerHTML = "Net Operating Income is negative. Cap Rate will be negative.";
}
var capRate = (noi / propertyValue) * 100;
resultDiv.innerHTML = "
Your Calculated Capitalization Rate:
" +
"" + capRate.toFixed(2) + "%";
}
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