Cap Rate Calculator
Calculate the capitalization rate for any investment property. Compare returns and make informed real estate investment decisions.
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Cap Rate Analysis
This cap rate is lower than average. May be better for appreciation plays.
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Understanding Cap Rate in Real Estate
The Capitalization Rate (Cap Rate) is one of the most important metrics in commercial and residential investment real estate. It represents the expected rate of return on an investment property based on its income.
Cap Rate Formula
Cap Rate = (NOI ÷ Property Value) × 100
Where NOI (Net Operating Income) = Gross Income - Operating Expenses (excluding mortgage payments)
What Affects Cap Rates?
- Location: Prime locations have lower cap rates
- Property condition: Newer properties command lower cap rates
- Tenant quality: Stable tenants reduce risk and cap rates
- Market conditions: Strong markets compress cap rates
- Interest rates: Rising rates generally increase cap rates
Frequently Asked Questions
What is a good cap rate for rental property?▼
A good cap rate depends on your market and investment strategy. Generally, 4-6% is common in stable, appreciating markets, while 8-12% is typical in cash flow focused markets. Higher cap rates usually indicate higher risk or less desirable locations.
How do you calculate cap rate?▼
Cap Rate = (Net Operating Income ÷ Property Value) × 100. For example, if a property generates $30,000 NOI and is worth $400,000, the cap rate is 7.5%.
What is the difference between cap rate and ROI?▼
Cap rate measures unlevered return (no mortgage) based on property value and NOI. ROI (Return on Investment) measures your actual return on cash invested, which includes the effects of leverage, appreciation, and other factors.
Why do higher cap rates mean higher risk?▼
Higher cap rates often indicate that investors require more return to compensate for risks like poor location, older buildings, economic instability, or tenant quality issues. Premium properties in strong markets command lower cap rates.
Should I use cap rate to compare properties?▼
Cap rate is useful for comparing similar properties in the same market. However, don't compare cap rates across different markets or property types, as market dynamics vary significantly.