Related Real Estate & Investment Calculators
What is Cap Rate?
The **Capitalization Rate (Cap Rate)** is one of the most fundamental concepts in real estate investing. It represents the expected rate of return on a real estate investment property based on the income that the property is expected to generate. It is calculated by dividing the property's Net Operating Income by its current market value.
The Cap Rate Formula
What is Net Operating Income (NOI)?
NOI is a property's annual income after all operating expenses have been deducted, but *before* deducting debt payments (mortgage) and income taxes. It is calculated as:
Operating expenses include property taxes, insurance, property management fees, repairs & maintenance, utilities, etc.
Frequently Asked Questions (FAQ)
What is a "good" Cap Rate?
A "good" cap rate is relative. A **high cap rate** (e.g., 8-12%) suggests higher potential return but also higher risk, often found in less stable markets or with older properties. A **low cap rate** (e.g., 3-5%) implies lower risk and a more stable, premium property, often found in high-demand locations like major city centers. Investors use cap rates to quickly compare the profitability and risk of different properties.
Is Cap Rate the same as ROI?
No. Cap Rate is a measure of a property's unleveraged return, meaning it does not account for the mortgage (debt financing). **Return on Investment (ROI)**, or more specifically Cash-on-Cash Return in real estate, calculates the return based on the actual cash you invested (your down payment) and considers the effect of your mortgage payments.