Cap Rate Calculator
The cap rate calculator can be used to accurately calculate the capitalization rate of real estate. In the real estate lending and appraisal sector, the cap rate is a valuable metric that uses the amount of income a property is able to generate as the means of estimating that property's value.
Gross Operating Income = $20,000 − $1,000 = $19,000
Net Operating Income (NOI) = Gross Operating Income − Operating Expenses
Net Operating Income = $19,000 − $6,000 = $13,000
Capitalization Rate = Net Operating Income / Purchase Price
Capitalization Rate = $13,000 / $250,000 = 5.2%
Capitalization Rate = 5.2%
What is a Cap Rate?
The capitalization rate, more commonly known by its abbreviation "cap" rate, is widely used to evaluate the worth of investment properties and calculate potential returns on investment.
The cap rate reflects your investment property's rate of return as measured by the amount of income you expect the property to produce.
This measurement can be more simply described as the ratio of net operating income to property asset value.
A cap rate is generally expressed as a percentage, with a higher percentage indicating a better rate of return but also an increased level of associated risk.
Capitalization Rate Formula
We apply the following formulas in our cap rate calculator to determine the capitalization rate for your property:
Capitalization Rate = Net Operating Income / Purchase Price
Net Operating Income (NOI) = Gross Operating Income − Operating Expenses
Cap Rate Calculator Example
Certainly! Here's an example of using a cap rate calculator with a table to calculate the capitalization rate:
Assume the following information for a property:
| Property | Net Operating Income (NOI) | Purchase Price |
|---|---|---|
| Property A | $50,000 | $500,000 |
| Property B | $70,000 | $800,000 |
To calculate the capitalization rate, we can use the table:
| Property | Net Operating Income (NOI) | Purchase Price | Capitalization Rate |
|---|---|---|---|
| Property A | $50,000 | $500,000 | - |
| Property B | $70,000 | $800,000 | - |
-
Calculate the capitalization rate for Property A: Capitalization Rate = NOI / Purchase Price = $50,000 / $500,000 = 0.10 or 10% (as a decimal)
-
Calculate the capitalization rate for Property B: Capitalization Rate = NOI / Purchase Price = $70,000 / $800,000 = 0.0875 or 8.75% (as a decimal)
Therefore, the capitalization rates for Property A and Property B would be 10% and 8.75%, respectively.
Using a table allows you to compare the net operating income and purchase price for different properties and calculate the corresponding capitalization rates. The table provides a clear overview of the relevant information, making it easier to evaluate and compare the potential returns on investment for different properties.
