Real Estate & Mortgage Calculators

The Capitalization Rate (Cap Rate) is a ratio used to compare properties with different valuations, The Cap Rate is determined by taking the rental net operating income (NOI) and dividing it by the property's fair market value (usually the selling price). The higher the Capitalization Rate the more the property is worth to the investor.

One can also use cap rate to determine the general value of a property. As an example: a property generates $100,000 of annual net operating income and you know that the Capitalization Rate in the area is approximately 4%. That would mean that the approximate fair market value of the property is $2,500,000 ($100,000 / .04).

Cap Rate is used most often in comparing the relative value of properties. Say one property has a projected NOI of $20,000 and an asking price of $500,000 and a second property has a NOI of $10,000 but an asking price of $100,000. Going solely by the NOI one would assume that the first property was the better investment. However the cap rate shows that the second property with a cap rate of 10% is a far better investment than the second property with a cap rate of 4%.

($10,000 / $100,000) versus ($20,000 / $500,000).