NOI Cap Rate Calculator
Understanding the NOI Cap Rate Calculator
The Net Operating Income (NOI) Capitalization Rate (Cap Rate) is a fundamental metric used in commercial real estate to analyze the potential return on investment for a property. It helps investors quickly compare different properties and assess their profitability relative to their market value.
What is Net Operating Income (NOI)?
Net Operating Income (NOI) represents the income a property generates after deducting all operating expenses but before accounting for mortgage payments, depreciation, and capital expenditures. It's essentially the property's profitability from its core operations.
Formula for NOI:
NOI = Annual Rental Income – Annual Operating Expenses
Annual Rental Income: This includes all revenue generated from rent, as well as any other income derived from the property (e.g., parking fees, laundry income).
Annual Operating Expenses: These are the costs associated with running and maintaining the property. Common examples include property taxes, insurance, property management fees, utilities (if paid by the owner), repairs, and maintenance. Importantly, mortgage principal and interest payments, depreciation, and capital expenditures (like major renovations) are *not* included in operating expenses for NOI calculation.
What is the Cap Rate?
The Capitalization Rate (Cap Rate) expresses the relationship between the property's Net Operating Income (NOI) and its market value or purchase price. It is typically expressed as a percentage.
Formula for Cap Rate:
Cap Rate = (NOI / Property Value) * 100%
A higher cap rate generally indicates a potentially higher return on investment, assuming similar risk levels. Conversely, a lower cap rate might suggest lower risk or lower potential returns.
How to Use the Calculator:
- Annual Rental Income: Enter the total gross income you expect to receive from rent and other sources over a full year.
- Annual Operating Expenses: Enter all the costs associated with managing and maintaining the property for a year, excluding mortgage payments and depreciation.
- Property Purchase Price (or Market Value): Enter the price you paid for the property or its current estimated market value.
- Click "Calculate Cap Rate". The result will show the estimated annual return on investment based on the property's net operating income and its value.
The cap rate is a useful tool for initial property analysis, but it should be used in conjunction with other financial metrics and a thorough understanding of the local market.