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The Capitalization Rate (Cap Rate) is a fundamental metric used in real estate to estimate the potential return on an investment property. It indicates the rate of return that is expected to be generated on a real estate investment property.
Cap Rate = Net Operating Income / Property ValueA 'good' cap rate varies by market and asset class. Generally, 4% to 10% is considered typical. Higher cap rates imply higher risk and higher potential return, while lower cap rates imply safer, lower-return assets.
Net Operating Income (NOI) is calculated by subtracting all operating expenses (taxes, insurance, maintenance, property management) from the total income generated by the property. It excludes mortgage payments.
No. Capitalization Rate is a measure of an unleveraged return on investment. It does not account for debt service (mortgage payments).
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