If you like to dabble in real estate, then a cap rate calculator is going to be familiar to you. Also called the capitalization rate calculator, it helps you to determine the cap rate on the value of your property as well as the income you receive from it. Such a tool can help you to work out whether the buyer’s asking price will net you lucrative returns, as well as what you can realistically ask for if you are selling a building.
Below, you can learn how to calculate your capitalization rate. Also, you can use a commission calculator to work out what your realtor will make from selling a building.
What is a Cap Rate?
A cap rate is your real estate investment’s rate of return. It’s the rate of what you get every year for your investment. An example of this is below.
You bought a property for $500,000 with a capitalization rate of 15 percent. Every year, you will earn 15 percent of what you paid for the property. After close to seven years, you will begin to make money on your investment.
What is the Formula for Working Out the Cap Rate?
After looking at what a cap rate is, it’s not all that challenging to work the calculation out for yourself. The cap rate formula ends up being the ratio between your property’s value and the net income.
Cap rate = the net income / the property value
If you are a seasoned investor with a bit more knowledge in the field, you may also like to add more information to the cap rate calculator, such as the vacancy rate and your operating expenses. With new parameters, the cap rate formula will look like this.
The net income = (100 – operating expenses) [%] x (100 – vacancy rate) [%] x gross income
How Do You Calculate the Cap Rate?
You can use the cap rate calculator, the formula above, or the following steps to find out your cap rate.
1. Identify the value of the property. For the example, $100,000.
2. What is the gross rental income – what your tenants bring in? We will say it’s $15,000.
3. Work out the vacancy rate – how long it sits empty. In this example, we will use 1%.
4. Work out the percentage of operating expenses. If you spend $250 per month on expenses, it works out to $3,000 annually – 20 percent of your gross income.
5. Use this formula to work out the net rental income
The net income = (100 – 20)% x (100 – 1)% x $15,000 = 0.9 x 0.99 x $15,000 = $11,880
6. Divide the net income by the value of the property
Cap rate = $11,880 / $100,000 = 11.88 percent
The Application of a Capitalization Calculator
If you want to sell your property, then a capitalization rate is quite important. People want to know what their returns are and when they hope to make money on their investment. If you don’t know how much your property is worth, a cap rate calculator is even more valuable.
Let’s say you only know that you earn $2,000 per month or $24,000 per year. You then ask your commercial real estate agent for the average cap rate in the area. For argument’s sake, we’ll say it’s 10 percent.
You can calculate the market value of your property using that information so you can get a fair price for it.
$24,000 / 10% = $24,000 / 0.10 = $240,000