How to Use Cap Rate Calculator
Enter the value or cost of the property.
If you know the net operating income enter it in the specified box, otherwise enter the total income and expenses and the calculator will calculate it for you.
How to calculate the cap rate of a property
Cap Rate Forumla
: Net operating Income/Value or cost of property
Some things to consider when using cap rate
- Tenants in the property
- Age of the building
- Economic state of the region
- We find an apartment complex that sold for $450,000, we have our cost
- We now need to find the net operating income of the complex
- The income is $62,000 and expenses are $30,000, therefor our net operating income is $62,000 - $30,000 = $32,000
- We then use the formula Net Operating income/value or cost
- $32,000/$450,000 = 0.0711 the cap rate for the property is 7.1%
- There is another apartment complex that is valued at $120,000
- Total income is $15,600 with $7,600 in expenses
- Property's net operating income is $15,600 - $7,600 = $8,000
- Use the formula of net (operating income)/(value or cost)
- $8,000/$120,000 = 0.0666666667 which means the cap rate is 6.66 percent
Cap Rate Definition Capitalization Rate is the rate of return expected from an investment in property based on the amount of income you think it will generate.
Before investing in property, it is best to calculate the value of a income producing property. This involves the Net operating income (NOI) of the property and the value or cost of the property. To obtain the net operating income, deduct any operating expenses from the gross operating income of the property. Operating expenses can vary from property tax, maintenance costs, utilities etc.
Benefits of using Cap Rate
- Valuing a property you intend on selling by checking similar properties sold and their cap rates
- Check if the price of a property is reasonable.
- Comparing similar properties you are interested in purchasing.
- It can give an insight to upcoming trends in the market and a view of where the market is going, if cap rates of a particular properties are increasing or decreasing.
The Cap rate is used in the world of commercial real estate, higher the cap rate is, the better. It shows the potential rate of return for the property per year.