Cap Rate Formula

The capitalization rate (cap rate) is a metric used to estimate the return on a real estate investment. It is calculated by dividing the property’s annual net income (income after operating expenses) by its current market value or purchase price. For example, if a property is worth $1 million and generates $80,000 annually after expenses, the cap rate is 8% ($80,000 divided by $1 million). This percentage helps investors compare different properties and assess the potential profitability and risk of an investment, with higher cap rates often indicating higher risk and potential returns.