Net Operating Income =

Capitalization Rate =

Value =

Calculates an Overall Rate of Return (OAR) for an income-producing property. Cap Rate is used to convert a single-year Net Operating Income to an estimate of Market Value, or most probable selling price. This is often called Income Rate Valuation (or IRV). As an OAR, cap rate reflects the property's ability to produce a return free-and-clear of any debt. Consequently, the calculation can be used to determine the leverage position of mortgage financing.

- Net Operating Income: Net operating income (NOI) for a property.

- Capitalization Rate: Capitalization (or cap) rate, expressed as a percentage. The cap rate reflects the market perception of risk associated with a particular real estate investment.

- Value: Market value for the property. This could be the most probable selling price of a real estate investment.

What's the capitalization rate of an income producing property that generates $100,000/year in net operating income and has an estimated market value of $2,000,000?

- Net Operating Income: $100,000

- Value: $2,000,000

The capitalization rate is 5%.

Net Operating Income

Capitalization Rate

Value

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NOI

Overall Rate of Return

OAR

Income Rate Valuation

IRV

Cap Rate