Capitalization Rate (Cap Rate) Calculator
The Capitalization Rate, or Cap Rate, is a key metric used in real estate to estimate the potential return on an investment property. It's calculated by dividing the property's Net Operating Income (NOI) by its current market value or purchase price. A higher cap rate generally indicates a more attractive investment, suggesting a higher potential return relative to the property's cost.
Understanding Cap Rate
The formula for Cap Rate is straightforward:
Cap Rate = (Net Operating Income / Property Value) * 100
Net Operating Income (NOI) is the annual income a property generates after deducting all operating expenses, but before accounting for debt service (mortgage payments) and income taxes. Key components of NOI include:
- Potential Gross Income: The total rental income if the property were 100% occupied at market rates.
- Vacancy and Credit Losses: An allowance for periods when units are vacant or tenants fail to pay rent.
- Other Income: Revenue from sources like parking fees, laundry facilities, or vending machines.
- Operating Expenses: Costs associated with running the property, such as property taxes, insurance, property management fees, utilities (if paid by owner), repairs and maintenance, and administrative costs.
Property Value / Purchase Price is the current market value or the price at which you are considering purchasing the property.
Interpreting the Result: The resulting percentage represents the unleveraged rate of return on the property. For instance, a 10% cap rate on a $500,000 property means the property is generating $50,000 in NOI annually. Investors use cap rates to compare different investment opportunities, with higher cap rates generally signifying potentially higher returns, though they don't account for financing or appreciation.
function calculateCapRate() {
var noiInput = document.getElementById("netOperatingIncome");
var valueInput = document.getElementById("propertyValue");
var resultDiv = document.getElementById("capRateResult");
var netOperatingIncome = parseFloat(noiInput.value);
var propertyValue = parseFloat(valueInput.value);
if (isNaN(netOperatingIncome) || isNaN(propertyValue) || propertyValue === 0) {
resultDiv.innerText = "Invalid input. Please enter valid numbers.";
return;
}
var capRate = (netOperatingIncome / propertyValue) * 100;
resultDiv.innerText = capRate.toFixed(2) + "%";
}
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