Cap Rate Value Calculator
Calculation Results
Understanding Cap Rate in Real Estate
The Capitalization Rate, or Cap Rate, is a fundamental metric used in real estate to assess 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.
The Cap Rate Formula
Cap Rate = (Net Operating Income / Current Market Value) × 100
Key Components
- Net Operating Income (NOI): This is your gross rental income minus all necessary operating expenses (property taxes, insurance, maintenance, management fees). It does not include mortgage payments or capital expenditures.
- Market Value: The current price the property would fetch on the open market or the purchase price.
Example Calculation
Imagine you are looking at a commercial building valued at $1,000,000. It generates $120,000 in annual rent. After paying for taxes, repairs, and management, your total operating expenses are $40,000.
- Calculate NOI: $120,000 – $40,000 = $80,000.
- Calculate Cap Rate: ($80,000 / $1,000,000) × 100 = 8.0%.
In this example, the property has an 8% Cap Rate. Generally, a higher cap rate implies higher risk but higher potential return, while a lower cap rate indicates a safer investment in a highly desirable area.
Why Use This Calculator?
Investors use cap rate value to compare similar real estate investments quickly. It allows you to strip away the complexities of financing (mortgage rates and down payments) to see how the property performs as a standalone asset. It is the gold standard for valuing multi-family, office, and retail properties.