Understanding Cap Rate: A Key Real Estate Metric

What is Cap Rate?

The capitalization rate (cap rate) is a fundamental metric in real estate that helps investors quickly assess a property's potential return on investment.

The Basic Formula

Cap Rate = (Net Operating Income / Property Value) × 100

Why Cap Rate Matters

1. Quick Comparison: Easily compare different investment properties
2. Market Insights: Understand risk and potential returns
3. Valuation Tool: Estimate property value based on income

Key Considerations

• Higher cap rates often indicate higher risk
• Lower cap rates suggest more stable, lower-risk investments
• Typical cap rates vary by property type and location

Using Our Cap Rate Calculator

Our professional cap rate calculator helps you analyze properties quickly and accurately.

Real-World Example

Property A:

• Purchase Price: $1,000,000
• Annual NOI: $80,000
• Cap Rate: 8%

Property B:

• Purchase Price: $800,000
• Annual NOI: $56,000
• Cap Rate: 7%

Always consider more than just the cap rate when making investment decisions.