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The capitalization (cap) rate for a property is a ratio that measures the annual rate of return for an investment property. It is commonly used as a measurement to compare like properties for appraisal valuations or other comparative analysis. A cap rate is calculated by dividing the Net Operating Income (NOI) of a property by the purchase price (for new purchases) or the value (for refinances).
Use the calculator below to calculate your cap rate. Simply enter your NOI and purchase price or market value. The cap rate value will be automatically calculated for you. You can also move the cap rate slider to find the needed NOI for any given cap rate. In inclusion to our web-based calculator, feel free to download the Excel version below.
Download Excel Version
Calculated Cap Rate: 8.73%
Calculated Cap Rate: 0%
Cap Rate = NOI / Value
In order to calculate the capitalization rate, you need the property’s net operating income readily available. If you must calculate the property’s net income first, you would subtract all of the expenses directly related to the property (excluding mortgage interest, depreciation, and amortization) from the income of the property. For the purposes of this example, say you are purchasing a property for $1,000,000 that has gross rents of $100,000 and expenses of $30,000. This would give you a NOI of $70,000. In order to calculate the cap rate from there, you would divide the $70,000 NOI by the $1,000,000 purchase price, giving you a cap rate of 7.0%.
Calculations:NOI: $100,000 – 30,000 = $70,000Cap Rate: $70,000 / $1,000,000 = 0.07 (7.0%)
Cap rates are useful for many purposes, but there are some circumstances on which their accuracy cannot be relied upon in order to make financial decisions. The following are some circumstances where cap rates may not be useful to a real estate investor:
It is important to keep in mind that the capitalization rate ratio can be very useful for helping determine whether or not a property is worth continued diligence, but it should not be the only thing that a real estate investor should rely upon when considering the purchase of a commercial property.
Note: The commercial mortgage calculators displayed in this website should be used as a guideline and do not represent a commitment to lend. Commercial Loan Direct and CLD Financial, LLC are not liable for any calculation errors resulting from the use of these calculators.
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