Cap Rate Calculator
Calculate the capitalization rate of an apartment property.
Capitalization Rate Calculator
How Do You Calculate a Cap Rate?
The capitalization rate can be found by dividing an asset’s net operating income by its current market value. To better understand how to calculate cap rate, imagine a property with a net operating income of $500,000 at a market value of $5,000,000. This property would have a capitalization rate of 10%.
Capitalization Rate Formula:
The capitalization rate can be determined by utilizing the following formula:
Capitalization Rate = Net Operating Income ÷ Current Market Value
In the example above, $500,000 (NOI) divided by $5,000,000 = 10%, the cap rate.
What Is a Cap Rate?
A capitalization rate, or simply cap rate, is used in multifamily financing to determine the annual net gain or loss of profit on an investment that is expected to be generated on an apartment property. A cap rate is calculated by dividing the net operating income of a property by its market value. The metric is expressed as a percentage.
Understanding and Utilizing Cap Rates
Cap rates are utilized by appraisers to determine the value of a commercial property. This metric is also the key behind the income capitalization approach to property valuation. Put simply, a cap rate represents the yield of a property over the duration of a year. A cap rate also indicates the length of time it will take an investor to recover a staked amount in a property. In other words, a property with a cap rate of 10% would be expected to take around 10 years for an investor to recover the investment amount. Additionally, you can use the relationship between a property’s NOI and cap rate to determine the property value if you know what cap rates similar properties (those of similar vintage and asset class) are trading for in that submarket.
While capitalization rates can be useful for lightly comparing the relative value of similar properties on the market, they shouldn’t be used as the sole indicator of an investment property’s strength because it does not take some key factors — such as leverage — into account.
Since capitalization rates are based on projected estimates of future income, they are subject to high variation. It is imperative for an investor to understand what constitutes a good cap rate for an investment in any given situation. In regards to apartment loan programs, there are no clear ranges for a good or bad cap rate, and the ranges that investors do find are broadly dependent on the context of the property and the market it resides in.
Speak with a multifamily mortgage specialist by filling in the form below.