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Estimated Cap Rate
0%
Understanding Capitalization Rate (Cap Rate)
The Capitalization Rate, or "Cap Rate," is one of the most vital metrics used in commercial real estate to evaluate the profitability and return potential of an investment property. It represents the yield of a property over a one-year time horizon assuming the property is purchased for cash and not financed.
How to Calculate Cap Rate
The formula for Cap Rate is straightforward but relies on accurate Net Operating Income (NOI) data:
Cap Rate = (Net Operating Income / Current Market Value) x 100
Key Components
Net Operating Income (NOI): This is the total income generated by the property (rent, parking, laundry) minus all necessary operating expenses (property taxes, insurance, maintenance, utilities). It does not include mortgage payments or capital expenditures.
Property Value: The current market price or the purchase price of the asset.
Investment Examples
Property Type
Annual NOI
Value
Cap Rate
Multi-Family Apartment
$120,000
$2,000,000
6.00%
Retail Strip Center
$85,000
$1,100,000
7.73%
Industrial Warehouse
$250,000
$5,000,000
5.00%
What is a "Good" Cap Rate?
There is no universal "good" cap rate. Generally, a higher cap rate indicates a higher potential return but also higher risk. Factors affecting cap rates include:
Location: Properties in "Class A" markets (like NYC or London) have lower cap rates due to stability and high demand.
Property Type: Industrial and multifamily assets often have lower cap rates than office or retail spaces.
Interest Rates: As federal interest rates rise, cap rates typically follow suit to remain attractive to investors.
function calculateCapRate() {
var noiInput = document.getElementById('noi');
var valueInput = document.getElementById('propertyValue');
var resultDiv = document.getElementById('creResult');
var output = document.getElementById('capRateOutput');
var interpretation = document.getElementById('creInterpretation');
var noi = parseFloat(noiInput.value);
var value = parseFloat(valueInput.value);
if (isNaN(noi) || isNaN(value) || value <= 0 || noi < 0) {
alert("Please enter valid positive numbers for both NOI and Property Value.");
resultDiv.style.display = "none";
return;
}
var capRate = (noi / value) * 100;
var formattedCapRate = capRate.toFixed(2);
output.innerHTML = formattedCapRate + "%";
resultDiv.style.display = "block";
// Dynamic interpretation logic
var text = "";
if (capRate = 4 && capRate 7 && capRate <= 10) {
text = "A higher yield, potentially indicating a 'Value-Add' opportunity or a property in a secondary market with higher risk.";
} else {
text = "Very high cap rate. This may indicate significant risk, high vacancy, or a distressed property in a declining market.";
}
interpretation.innerHTML = "Market Insight: " + text;
}