1. What is Cap Rate?

The capitalization rate (cap rate) is a fundamental metric used in real estate to estimate the potential return on an investment property. It represents the ratio between the net operating income (NOI) produced by a property and its current market value or purchase price.

2. How Does the Calculator Work?

The calculator uses the cap rate formula:

Where:

• \( Annual NOI \) — Net operating income in USD
• \( Purchase Price \) — Property purchase price in USD

Explanation: The cap rate shows what percentage of the property's value is returned each year as NOI, providing a quick way to compare different investment opportunities.

3. Importance of Cap Rate Calculation

Details: Cap rate helps investors assess the risk and potential return of a property, compare different investment opportunities, and make informed decisions about property purchases.

4. Using the Calculator

Tips: Enter the property's annual net operating income and purchase price in USD. Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What is a good cap rate?
A: Generally, 4-10% is typical, but this varies by market and property type. Higher cap rates indicate higher risk.

Q2: How does cap rate differ from ROI?
A: Cap rate doesn't account for financing costs, while ROI does. Cap rate shows unleveraged return.

Q3: Should I always choose the property with the highest cap rate?
A: Not necessarily. Higher cap rates often come with higher risks. Consider location, property condition, and growth potential.

Q4: How does NOI relate to cap rate?
A: NOI is the numerator in the cap rate formula. It's calculated as gross income minus operating expenses (excluding financing costs).

Q5: Can cap rate be negative?
A: Typically no, since NOI should be positive for an investment property. Negative NOI would indicate the property isn't generating enough income to cover expenses.