Cap Rate Formula

Capitalization rate formula.

Cap rate formula.

In instances where the purchase or market value is unknown investors can determine the capitalization rate using a different equation based upon historical risk premiums. Remember there can be good reasons why a property would justify a better cap rate. Article table of contents skip to section. What a cap rate is how it works.

They can be used to determine a good sales price or the value of a listed property versus the asking price. Net operating income is the annual income annual income annual income is the total value of income earned during a fiscal year. X research source 2 x research source if you are considering an investment property then you may want to calculate the cap rate first and then. Cap rates are widely used in commercial and multi family property valuation and profitability studies.

The formula for cap rate is equal to net operating income noi divided by the current market value of the asset. Relevance and uses of capitalization rate formula. The capitalization rate is useful for investors to compare properties. Switch around the formula and multiply the asking price by the cap rate.

The formula for cap rate or capitalization rate is very simple and it is calculated by dividing the net operating income by the current market value of the asset and is expressed in terms of percentage. When you take into account that most investors consider a cap rate of 10 percent or more to be positive a rate of 7 8 percent gives an investor an idea about their return on the investment. Multiply 495 000 by 9 2 percent and you come up with a required net operating income of 45 540. The rate is calculated in a simple fashion as follows.

In the most popular formula the capitalization rate of a real estate investment is calculated. A cap rate is a formula that investors often use as a tool to evaluate a real estate investment based off of a one year period. Some investors may calculate the cap rate differently. If all things are equal and any two properties have capitalization rates of 10 and 5 then the investor should choose the 10 return offered by the property.

Complete cap rate calculation. The cap rate expressed as the ratio of the property s net income to its purchase price allows investors to compare properties by evaluating a rate of return on the investment made in the property. It is used by the investors to evaluate real estate investment based on the return of a one year period. Several versions exist for the computation of the capitalization rate.

By dividing the yearly noi of 7 800 by the value of the property 100 000 we get a cap rate of 7 8 percent.