Cap Rate Calculator

The cap rate formula, also known as the capitalization rate formula, is a commonly used formula in real estate to determine the potential rate of return on a property investment.

 

The cap rate formula is:

Cap Rate = Net Operating Income (NOI) / Property Value

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Where:

• Net Operating Income (NOI) is the annual income generated by the property, minus all operating expenses (such as property taxes, insurance, maintenance costs, and management fees)

• Property Value is the current market value of the property

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The resulting number is expressed as a percentage, and represents the expected rate of return on the property investment. The higher the cap rate, the higher the potential return on investment.

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For example, if a property has an annual net operating income of $50,000 and a market value of $1 million, the cap rate would be calculated as follows:

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Cap Rate = $50,000 / $1,000,000 = 0.05, or 5%

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This means that the property has a potential rate of return of 5% based on the current income generated by the property and its market value.