Financial Statement Analysis
 Ratio Analysis of Financial Statements (Formula, Types, Excel)
 Ratio Analysis Advantages
 Ratio Analysis
 Liquidity Ratios
 Cash Ratio
 Cash Ratio Formula
 Quick Ratio
 Quick Ratio Formula
 Current Ratio
 Current Ratio Formula
 Acid Test Ratio Formula
 Defensive Interval Ratio
 Working Capital Ratio
 Working Capital Formula
 Net Working Capital Formula
 Changes in Net Working Capital
 Cash Flow from Operations Ratio
 Cash Reserve Ratio
 Operating Cycle Formula
 Current Ratio vs Quick Ratio
 Bid Ask Spread
 Liquidity vs Solvency
 Liquidity
 Solvency
 Solvency Ratios
 Equity Ratio
 Capital Adequacy Ratio
 Liquidity Risk
 Altman Z Score
 Turnover Ratios
 Inventory Turnover Ratio
 Accounts Receivable Turnover
 Accounts Receivables Turnover Ratio
 Accounts Payable Turnover Ratio
 Days Inventory Outstanding
 Days in Inventory
 Days Sales Outstanding
 Average Collection Period
 Days Payable Outstanding
 Cash Conversion Cycle
 Cash Conversion Cycle (CCC) Formula
 Fixed Asset Turnover Ratio Formula
 Debtor Days Formula
 Working Capital Turnover Ratio
 Profitability Ratios
 Profitability Ratios Formula
 Common Size Income Statement
 Vertical Analysis of Income Statement
 Profit Margin
 Gross Profit Margin Formula
 Gross Profit Percentage
 Operating Profit Margin Formula
 EBIT Margin Formula
 Operating Income Formula
 Net Profit Margin Formula
 EBIDTA Margin
 Degree of Operating Leverage Formula (DOL)
 NOPAT Formula
 OIBDA
 Earnings Per Share
 Basic EPS
 Diluted EPS
 Basic EPS vs Diluted EPS
 Return on Equity (ROE)
 Return on Capital Employed (ROCE)
 Return on Invested Capital (ROIC)
 Return on Sales
 ROIC Formula (Return on Invested Capital)
 Return on Investment Formula (ROI)
 ROIC vs ROCE
 ROE vs ROA
 CFROI
 Cash on Cash Return
 Return on Total Assets (ROA)
 Return on Average Capital Employed
 Capital employed Employed
 Return on Average Assets (ROAA)
 Return on Average Equity (ROAE)
 Return on Assets Formula
 Return on Equity Formula
 DuPont Formula
 Net Interest Margin Formula
 Earnings Per Share Formula
 Diluted EPS Formula
 Contribution Margin Formula
 Unit Contribution Margin
 Revenue Per Employee Ratio
 Operating Leverage
 EBIT vs EBITDA
 EBITDAR
 Capital Gains Yield
 Tax Equivalent Yield
 LTM Revenue
 Operating Expense Ratio Formula
 Overhead Ratio Formula
 Variable Costing Formula
 Capitalization Rate
 Cap Rate Formula
 Comparative Income Statement
 Capacity Utilization Rate Formula
 Total Expense Ratio Formula
 Efficiency Ratios
 Dividend Ratios
 Debt Ratios
 Debt to Equity Ratio
 Debt Coverage Ratio
 Debt Ratio
 Debt to Asset Ratio Formula
 Coverage Ratio
 Coverage Ratio Formula
 Debt to Income Ratio Formula (DTI)
 Capital Gearing Ratio
 Capitalization Ratio
 Interest Coverage Ratio
 Times Interest Earned Ratio
 Debt Service Coverage Ratio (DSCR)
 DSCR Formula (Debt service coverage ratio)
 Financial Leverage Ratio
 Financial Leverage Formula
 Degree of Financial Leverage Formula
 Net Debt Formula
 Leverage Ratios
 Leverage Ratios Formula
 Operating Leverage vs Financial Leverage
 Current Yield
 Debt Yield Ratio
 Solvency Ratio Formula
What is Cap Rate Formula?
The formula for Cap rate or Capitalization rate is very simple and it is calculated by dividing the net operating income by the current market value of the asset and is expressed in terms of percentage. A cap rate formula is used by the investors to evaluate real estate investment based on a return of a one year period. It is basically used to help decide whether a property is a good deal.
Mathematically, Cap Rate Formula is represented as,
Explanation of the Cap Rate Formula
The calculation of the cap rate equation can be done in the following three simple steps:
 Step 1: Firstly, the rental income of the real estate property has to be estimated correctly. Based on that the calculation of the net operating income is done which is basically the annual income generated by the real estate property minus all the expenses that are incurred during the operations which include tasks like managing the property, paying taxes, insurance etc.
 Step 2: Secondly, the current market value of the property has to be assessed properly, preferably by a reputed valuation professional. The current market value of the property is its worth in the marketplace.
 Step 3: Finally, the calculation of cap rate equation can be done by dividing the net operating income by the current market value of the investment property.
Examples of Cap Rate Formula (with Excel Template)
Let us see some simple to an advanced example of Cap Rate Equation to understand it better.
Cap Rate Formula – Example #1
Let us assume that an investor is planning to buy a real estate property. Now, the investor intends to take the decision on the basis of the cap rate which is an effective metric in the evaluation of real estate properties. The investor finds three properties with their respective annual income, expenses and market values as mentioned below:
Now let us do the calculation of cap rate for the respective properties,
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Cap Rate for Property A
So, Cap Rate for property A = ($150,000 – $15,000) ÷ $1,500,000
Cap Rate = 9%
Cap Rate for Property B
So, Cap rate for property B = ($200,000 – $40,000) * 100% ÷ $4,500,000
Cap rate= 3.56%
Cap Rate for Property C
So, Cap rate for property C = ($300,000 – $50,000) * 100% ÷ $2,500,000
Cap rate= 10.00%
Therefore, the investor should buy property C since it offers the highest cap rate of 10%.
Cap Rate Formula – Example #2
Let us assume that there is another investor who wants to buy a real estate property and the investor has the belowmentioned information. The investor will invest in the property only if the cap rate is 10% or higher.
Now, based on the above information, we have calculated the following values which will be further use in calculation of cap rate.
Annual Gross Revenue
Annual Expense
Net Operating Income
In the belowgiven template, we have used the calculation of cap rate equation.
So the calculation of cap rate will be –
 Cap rate = 12.38%
Now, since the calculated cap rate is higher than the target cap rate (10%) of the investor, therefore, the investor can invest in the concerned real estate property. Based on the calculated cap rate, it can also be inferred that the entire investment will be recovered in = 100.00% ÷ 12.38% = 8.08 years
Cap Rate Formula Calculator
You can use the following calculator for the calculation of Cap Rate.
Net Operating Income  
Current Market Value of the Asset  
Cap Rate Formula =  
Cap Rate Formula = 


Relevance and Use of Cap Rate Formula
 The principal use of a cap rate formula is to distinguish among different real estate investment opportunities. Let us assume that a real estate investment offers around 4% in return while another property has a cap rate of around 8%. Then, the investor is most likely to focus on the property with the higher return. Moreover, a cap rate can also show the trend for property which will indicate if there is a need for an adjustment based on the estimated rental income.
 From a real estate investor’s point of view, a cap rate formula is an essential tool as it enables an investor to evaluate a real estate property on the basis of its current market value and its net operating income. It helps at arriving at the initial return on an investment property.
 For an investor, a rising cap rate for a property can be indicative of a rise in rental income visàvis the price of the property. On the other hand, the investor can see a fall in cap rate as a sign of lower rental income relative to the price of the property. As such, the cap rate can be a critical factor for an investor to decide if the property is worth buying or not.
 Further, a cap rate formula can also be an indicator of the amount of time a real estate will take to recover the entire investment in that real estate property. Let us assume that a property offers a cap rate of around 10% cap which means that it will take 10 years (= 100% ÷ 10%) for the investor to recover the entire investment.
Recommended Articles
This has been a guide to Cap Rate Formula. Here we discuss its practical examples to understand the Cap Rate Equation. Here we also provide you with Cap Rate Formula Calculator with downloadable excel template. You can learn more about financial analysis from the following articles –
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