Capitalization rate is the rate of return on a real estate investment property (also know as a revenue property) based on the income that the property is expected to generate or is already generating when looking at historic earnings. The capitalization rate is used to estimate the investor's potential return on his or her investment.
The capitalization rate of an investment may be calculated by dividing the investment’s net operating income (NOI) by the current market value of the property determined by using a Compartive Market Analysis (CMA), where NOI is the annual return on the property minus all operating costs. The formula for calculating the capitalization rate can be expressed in the following way:
Capitalization Rate (Cap rate) = Net Operating Income (NOI) / Current Market Value
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