Cap Rate Calculator

How to Calculate Cap Rate

The capitalization rate, or cap rate, is a fundamental concept in real estate investment analysis. It provides a quick way to estimate the potential return on an investment property. This guide will walk you through the process of calculating and interpreting cap rates.

Cap Rate Formula

The formula to calculate the capitalization rate is:

$$CapRate = \frac{NetOperatingIncome}{PropertyValue} \times 100\%$$

Where:

• $$NetOperatingIncome$$ (NOI) is the annual income generated by the property after operating expenses
• $$PropertyValue$$ is the current market value of the property

Calculation Steps

1. Determine the property's Net Operating Income (NOI)
2. Determine the property's current market value
3. Divide the NOI by the property value
4. Multiply the result by 100 to convert to a percentage

Example Calculation

Let's calculate the cap rate for a property with the following details:

• Net Operating Income (NOI): $100,000
• Property Value: $1,000,000

Step 1: Apply the formula

$$CapRate = \frac{100,000}{1,000,000} \times 100\%$$

Step 2: Perform the calculation

$$CapRate = 0.10 \times 100\% = 10\%$$

Step 3: Interpret the result

The cap rate for this property is 10%. This means the property is generating an annual return of 10% on the investment, based on its current market value and net operating income.

Visual Representation

This doughnut chart illustrates the relationship between Net Operating Income and Property Value in our example calculation, with the Cap Rate represented as the percentage of NOI to Property Value.