Cap Rate Calculator
Using the Cap Rate to Evaluate Investment Opportunities
The Capitalization Rate, or Cap Rate, is a real estate investing metric that measures the expected return on investment based on the property’s net operating income (NOI) and current market value. It’s a useful tool to compare the profitability and risk of different investment properties.
Our Cap Rate Calculator makes it easy to calculate the Cap Rate so you can make smart decisions when buying or selling real estate. By knowing the Cap Rate you can see the potential returns and align your investments to your financial goals.
Cap Rate in Real Estate
- Investment Comparison: To compare properties regardless of price.
- Risk Assessment: Higher Cap Rates means higher risk and potentially higher returns.
- Market Analysis: Reflects market conditions and property performance in a specific area.
- change in NOI or property value.
Cap Rate Interpretation
- Higher Cap Rate: May have higher returns but higher risk or less desirable location.
- Lower Cap Rate: Found in prime locations with stable income but lower returns.
Cap Rate Factors
- Location: Geographic area and neighborhood.
- Property Type: Residential, commercial or industrial properties have different Cap Rates.
- Market Conditions: Economic and real estate market.
Using the Cap Rate Calculator for Investment
- Value Assessment: Is the property priced to its income?
- Portfolio Diversification: Compare Cap Rates across properties to balance risk and return.
- Negotiation Tool: Use Cap Rate to support your price negotiation.
Cap Rate Limitations
- Ignores Financing: Does not account for mortgage payments or financing costs.
- Static Snapshot: Reflects current NOI and value, not future changes.
- Variable Expenses: Assumes expenses are constant.
Related Metrics
- Cash-on-Cash Return: Includes financing by measuring annual pre-tax cash flow to cash invested.
- Internal Rate of Return (IRR): Accounts for time value of money and projected cash flows over the investment period.