Capitalization rate, commonly known as cap rate, is a key metric used in real estate investing to evaluate the return on investment of a property. It is calculated by dividing the net operating income (NOI) of a property by its current market value. The formula for cap rate is:

Steps to Calculate Cap Rate:

1. Determine the Net Operating Income (NOI):

   • NOI is the total income generated from the property minus all operating expenses (excluding mortgage payments, capital expenditures, and income taxes).
   $$\text{NOI} = \text{Gross Rental Income} + \text{Other Income} - \text{Operating Expenses}$$

2. Determine the Current Market Value:

   • This is the current market value or purchase price of the property.

3. Calculate the Cap Rate:

   • Divide the NOI by the current market value and multiply by 100 to get the cap rate percentage.

Example Calculation:

1. Gross Rental Income: $120,000 per year
2. Other Income: $10,000 per year (e.g., parking fees, laundry)
3. Operating Expenses: $50,000 per year
4. Current Market Value: $1,000,000

Step-by-step Calculation:

1. Calculate the NOI:

   $$\text{NOI} = \text{Gross Rental Income} + \text{Other Income} - \text{Operating Expenses}$$ $$\text{NOI} = 120,000 + 10,000 - 50,000 = 80,000$$

2. Calculate the Cap Rate:

   $$\text{Cap Rate} = \left(\frac{80,000}{1,000,000}\right) \times 100 = 8\%$$