Enter the net operating income and the mark price or value of a property into this calculator to determine the cap rate (%).
Cap Rate Formula
The following formula is used in real estate to calculate the cap rate, also known as the capitalization rate.
C = NOI / Value *100
- Where C is the cap rate (%)
- NOI is net operating income ($)
- Value is the market value of the property
What is a cap rate?
A cap rate is a term short for capitalization rate. It’s a term used in real estate to describe the ratio of operating income to property value. It’s one of the many metrics used to evaluate properties and their potential to earn revenue. The higher the cap rate the better the property it is to buy, in general at least. There are thousands of of metrics used in determining when to purchase a property and cap rate is just one of those.
The reason that cap rate is a popular metric is because it shows exactly the ratio of the cost of the property to the value of the property. Therefore, regardless of how the value of the real estate market goes, you can still understand what the property could yield you a positive ROI even without an increase in property value.
How to calculate cap rate?
The following is a step by step guide on how to calculate a capitalization rate.
- The first step in calculating a cap rate is to determine the NOI of the property. This is dependent on many factors including rent and other sources of income. For this example we are going to assume that the NOI is $100,000.00 per year.
- The next step is to determine the market value of the property. This is typically done by an appraiser, especially for commercial properties. We will assume for this example that the property is valued at $1,000,000.00.
- The final step is to plug in the values into the formula. So, C = 100,000/1,000,000*100 = 10 %
In this example, if you were to buy the property out right, you would make back your investment in 10 years with no increase in property value.