Cap Rate Calculator
The cap rate formula, also known as the capitalization rate formula, is a commonly used formula in real estate to determine the potential rate of return on a property investment.
The cap rate formula is:
Cap Rate = Net Operating Income (NOI) / Property Value
Net Operating Income (NOI) is the annual income generated by the property, minus all operating expenses (such as property taxes, insurance, maintenance costs, and management fees)
Property Value is the current market value of the property
The resulting number is expressed as a percentage, and represents the expected rate of return on the property investment. The higher the cap rate, the higher the potential return on investment.
For example, if a property has an annual net operating income of $50,000 and a market value of $1 million, the cap rate would be calculated as follows:
Cap Rate = $50,000 / $1,000,000 = 0.05, or 5%
This means that the property has a potential rate of return of 5% based on the current income generated by the property and its market value.