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--CAP RATE CALCULATOR--
WHAT IS A CAP RATE?
A capitalization rate, or cap rate, is a metric used in the real estate industry to evaluate the return on investment (ROI) of income-producing properties. It is calculated by dividing the property's annual net operating income (NOI) by the current market value or purchase price of the property. This ratio, expressed as a percentage, provides investors with an estimate of potential return, helping them assess the risk and return profile of a real estate investment. Essentially, the cap rate offers a quick snapshot of a property's yield in a given year, without accounting for mortgage financing, making it a useful tool for comparing the profitability of different real estate investments. A higher cap rate implies a higher return on investment, but also potentially higher risk. Conversely, a lower cap rate suggests a lower return, often associated with less risk and more stable investments. Generally speaking, a cap rate between 5% and 7% could be considered good for this region.
Imagine you're looking at a property that generates $120,000 in NOI annually and has a current market value or purchase price of $1,500,000.
Using the Inside NoVA CRE - Cap Rate Calculator below:
Monthly Rents Collected: $10,000
Monthly OPEX: $0
Purchase Price: $1,500,000
Cap Rate = $120,000/$1,500,000 = 0.08 or 8%