How to Calculate Cap Rate in Real Estate?

The capitalization rate is used by real estate investors to assess investment property and demonstrate its potential for profit, helping to decide whether they should purchase real estate. By using our capitalization rate calculator you can easily have it determined.

What is capitalization rate?

The capitalization rate is an important tool for investors because it helps them measure real estate based on its current value and net operating income (NOI). This gives them an initial return on investment property. The investor can review the growth of the capital rate for the property and see that there is an increase in income relative to its price. In contrast, a fall in the rate of capital as a whole indicates lower rental income compared to its price.

This tool should be used to help determine if a property is a good deal. Instead of using only the cap rate to determine whether to buy an investment property, we recommend using it as one of several different valuation tools.

Using the capitalization rate formula is appropriate when you are looking at how to calculate the annual rate of return of an investment property if you purchased the property entirely in cash. 

It is advisable to use the Cap Rate indicator when you need to compare several options for investing and determine at which return on investment will be most profitable.

How to calculate capitalization rate?

The capitalization rate is the ratio of net operating income to the value of assets and is expressed as a percentage. The restriction rate does not take into account your mortgage payments or costs associated with the purchase of real estate, such as lender rates and closing costs. That is why, along with the maximum value rate, one should pay attention to the general financial picture of investment real estate, including its return on investment (ROI), cash flow and the fact that comparable real estate is sold and rented.

Capitalization rate formula:

Capitalization Rate = Net Operating Income / Current Market Value

The maximum rate of this indicator is often used to determine the value of commercial real estate. Investors often use it as the main parameter in the approach of capitalization of income to real estate valuation.