Capitalization Rate Calculator
Answers the Question
How good of an investment is it?
Calculator for Capitalization Rate
What Is the Capitalization Rate?
The capitalization rate is a measure of how much wealth an investment generates, relative to its initial cost.
Without this formula, it would be very difficult to compare different investment opportunities.
Why Is it Important?
- It standardizes measures of return across investments that have very different cost bases.
Formula(s) to Calculate Capitalization Rate
- ANNUAL NET OPERATING INCOME / CURRENT VALUE
- Not considering the effects of inflation. In a highly inflationary environment, even investments that generate relatively low sums in the present can be worth substantially more in devalued units of currency. This is doubly true if the asset was purchased with loaned funds, as they can be repaid with inflated dollars.
- It ignores scrap value. Some investments that offer poor, or even moderate returns may still be quite valuable on the resale market. For instance, a decrepit building may contain valuable copper pipes, tin ceiling tiles, or other resalable features.
Also Known As
- cap rate