Updated about 2 months ago on . Most recent reply
π‘ How to Calculate Cap Rate (Made Simple)
Cap Rate (short for Capitalization Rate) is a quick way to measure how much income a property produces compared to its value. Investors use it to see if a deal makes sense.
π The Formula:
Cap Rate = Net Operating Income (NOI) Γ· Property Value
β’ Step 1: Find the NOI (Net Operating Income).
β’ Take the annual rent income.
β’ Subtract expenses like taxes, insurance, and maintenance (not the mortgage).
β’ Step 2: Divide NOI by the purchase price (or property value).
π Example:
β’ Rent income: $24,000/year
β’ Expenses: $6,000/year
β’ NOI = $18,000
β’ Purchase Price = $300,000
Cap Rate = $18,000 Γ· $300,000 = 6%
β
A higher cap rate = potentially higher return (but usually higher risk).
β
A lower cap rate = safer area/property, but less return.
- Marcus Adam