Cap Rate Formula

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.

Cap rate formula.

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. The capitalization rate is useful for investors to compare properties. 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. Several versions exist for the computation of the capitalization rate.

Article table of contents skip to section. Capitalization rate formula. Switch around the formula and multiply the asking price by the cap rate. What a cap rate is how it works.

Gross annual income refers to all earnings before any deductions are made and. Net operating income is the annual income annual income annual income is the total value of income earned during a fiscal year. A good cap rate is typically higher than 4 percent. Relevance and uses of capitalization rate formula.

It is used by the investors to evaluate real estate investment based on the return of a one year period. 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. Remember there can be good reasons why a property would justify a better cap rate. In the most popular formula the capitalization rate of a real estate investment is calculated.

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. Cap rates are widely used in commercial and multi family property valuation and profitability studies. The rate is calculated in a simple fashion as follows. Complete cap rate calculation.

Some investors may calculate the cap rate differently. They can be used to determine a good sales price or the value of a listed property versus the asking price. 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. 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.

Multiply 495 000 by 9 2 percent and you come up with a required net operating income of 45 540.