how to calculate the cap rate
There are many ways to calculate the cap-rate, but here's the most popular. The following formula can be used to calculate the cap rate:
When assessing property you expect to generate regular, predictable income, the cap rate can be a useful metric. You might calculate the cap rate of a 4-unit apartment block occupied by tenants on year-long leases.
Annual operating expenses are $5,800, $3,800 in property taxes, and $2,000 for maintenance.
There are many ways to calculate the cap-rate, but here's the most popular. The following formula can be used to calculate the cap rate:
The above cap rate calculation assumes that you receive full rent each month. This means that the property is 100% occupied for at least one year. For a single-family home, 100% occupancy is possible but less so for multiunit buildings with higher turnover. When calculating your cap rate, it's important to take into account a lower than 100% occupancy rate. Here's how:
Net operating income: This is your gross rental income minus operating expenses such as payroll and repairs. This is how you calculate this number:
Capitalization rate (or "cap rate") is one of the most important indicators of property's potential investment. Cap rate is the annual rate of return that you can expect to see for your investment.
Real estate investors often include a 5--10% expected loss of rent in their calculations. Assume a 90% occupancy rate in the above example.
