How to calculate CAP Rate

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How to calculate CAP rate

Learning how to calculate CAP rate is easy!

The CAP rate or capitalization rate is the ratio of Net Operating Income to property asset value.

Net Operating Income / Purchase Price = CAP Rate

Suppose the property you’re purchasing costs $120,000 and the Net Operating Income is $12,640, then:

$12,640 / $120,000 = 0.1053

$12,640 / $120,000 x 100 = 10.53%

The CAP rate in this example is 10.53%.

The CAP rate is particularly useful if we purchase the property for all cash. But even when we’re not, it is good to know the CAP rate. A CAP rate greater than 10% is generally considered good. Adjust it to suit your needs.

Check out the The Ultimate Beginner’s Guide to Buying Real Estate Rental Properties.

The Ultimate Beginner's Guide to Buying Real Estate Rental Properties

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