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Cap Rate Calculator

Cap Rate Calculator

Property value

$

Annual gross income

$

Operating expenses ?

$

 

Vacancy rate (Optional) ?

%
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Use this cap rate calculator that helps you to determine the Cap rate of any property you own along with your gross operating income and Annual net income. This capitalization calculator gives you a complete and step-by-step solution for calculating cap rates based on the cap rate formula. Read on to develop insight about cap rates and learn how to calculate cap rates.

What is Cap Rate Definition?

Capitalization rate can be defined as a real estate valuation to make comparisons among different real estate investments. In simple words, it represents the rate of return on a real estate investment property. You can calculate the cap rate by taking the ratio between the net operating income generated by an asset and the original capital cost. You can use the best cap rate calculator to measures the annual rate of return for any investment.

Cap Rate Formula:

To make a precise cap rate calculation you can apply its formula:

  • Cap rate formula: Net Operating Income (NOI) / current market value of the asset

However, Net operating income in this formula represents your annual income. You can calculate it as follows:

  • Net Operating Income or NOI = Gross Operating Income − Operating Expenses
  • Annual Net Income = ((100 – Operating Expenses) %) * ((100 – Vacancy Rate) %) * Annual Gross Income

Whereas the Gross Operating Income = Annual Gross Income − Vacancy Rate

However, an online Mortgage Calculator that helps to calculate mortgage payment and works as a home loan.

How to calculate Cap Rate (step-wise)?

You can calculate the cap rate by using a cap rate calculator for making quick and automatic calculations. Additionally, you can implement a cap rate formula to make step-wise manual calculations. Some simple steps for the calculation of cap rates are:

  • First of all, determine the value or selling price of the property.
  • Now you have to Find out gross rental income. In simple words, it is the amount of money you get from renters every year.
  • Define the vacancy rate. It is the total time when your property stays unoccupied.
  • Determine the percentage of yearly expenses.
  • Now apply the formula to calculate the net rental income.
  • In the end, divide the net income by the property value for calculating the cap rate.

Example:

If the selling price of your property is $100,000, gross rental income is $50,000 per year with a 2% of vacancy rate then what will be the cap rate. Whereas you are spending $200 monthly, and $2400 every year for the maintenances of your property. which is equal to 20% of your gross income.

Solution

  • First of all, calculate the net income:
  • Net Income or NOI = Gross Operating Income − Operating Expenses
  • Net income = (100 – 20) % * (100 – 2) % * $50,000 = 0.8 * 0.98 * $50,000 = $39,200
  • Now to calculate cap rates apply the Cap rate formula is: Net Operating Income (NOI) / current market value of the asset.
  • Real estate Cap rate = $39,200 / $100,000 = 0.392%

Importance of Cap Rate in Real Estate:

The capitalization rate is important for numerous reasons, such as:

  • In real estate cap rate is important to discriminate among different investment opportunities.
  • Cap rate is considered important for setting various trends for all commercial property owners. These trends can help you to understand where the market may head in the future.
  • With the help of Cap Rate calculation, you can estimate supply and demand for any particular asset.
  • Cap rates reflect the asset grade

Furthermore, the online Payback Period Calculator lets you calculate the payback periods with discounts, estimate your average returns and schedules of investments.

How Cap Rate Calculator Works?

To quickly determine the cap rate of your assets, take assistance from the capitalization rate calculator as follows:

Input:

  • First, Enter the total value of your property as well as enter your annual gross income
  • Now, enter the percentage of your annual operating expenses.
  • Enter the vacancy rate. This step is optional so you can skip it as well.
  • Hit the calculate button.

Output:

This cap rate calculator will give you:

  • Cap rate as a first output
  • Your gross operating income
  • Annual net income
  • In the end, it will display a complete step by step solution along with the formulas to calculate the cap rate

What is a Good Cap Rate?

For many people, it is good to buy a property with less than a 12% cap rate. Some people will consider it too low and for others, it will be too high. So we can conclude that a good cap rate always depends on the situation. For example:

  • If you are going to buy a fully stabilized asset, then look for something with an average cap rate.
  • If you want to make a deal where you can potentially add value, then all those deals with a lower cap rate will be beneficial for you.
  • On the other hand, if you are dealing in problem areas then all those deals that have high cap rates will be a good option. However, you can use a cap rate calculator to make an estimation before purchasing or selling anything.

 FAQs:

How High or Low Cap Rate Is better?

It depends on the buyer or seller of the property. If the buying person wants to have a high cap rate, then it is an indication that the price of the property is low. On the other hand, if the selling price is high then it means that the cap rate is low.

Is Cap Rate the same as ROI?

Cap rate measures the rate of annual revenue on the basis of NOI before financing expense. On the other hand, ROI represents the total return of an investment that is high in power. Cap rate stays the same but ROI keeps on fluctuating.

What happens to Cap Rates when Interest Rates Rise?

The answer to this query based on the following three things:

  • The cost of debt will always increase with the increase in interest rates.
  • The cost of equity also increases as interest rates increase.
  • Eventually, the cap rates will also increase with the increase in interest rates.

What is the 2% rule?

This 2% rule indicates an investing strategy in which investor risks no more than 2% of their available capital while trading. To apply the 2% rule, you have to determine available capital, any kind of future fees, or commissions.

What are Acceptable Cap Rates?

According to the market capitalization formula, an average capitalization rate is normally between 4% to 8% but varies depending upon factors and situation as well as how much risk can take an investor comfortably.

Why Higher Cap Rate is Riskier?

A higher capitalization is riskier for the same reason that each high percentage investment is risky. It all to do with potential uncertainty and probability is called the Risk-Return Tradeoff, which is a well-known investment principle.

Conclusion:

This capitalization rate calculator is a good option for all those who are interested in the real estate business. It helps you to make precise cap rate calculations whenever you want to decide whether a property’s price is justified or not. With the help of this cap rate calculator, you can easily estimate the selling price of a property you own. Additionally, it is great to help for learning and educational purposes.

Reference: 

From the source of Wikipedia: Capitalization rate, Use for valuation, Cash flow defined.

From the source of Investopedia: Capitalization Rate Formula, Examples of Capitalization Rate, Interpreting the Capitalization Rate, Gordon Model Representation for Cap Rate.

From the source of wikiHow: Figure Cap Rate, Using Cap Rates Wisely.