To calculate the cap rate, divide a property’s Net Operating Income (NOI) by its current market value. Here’s the formula:
Cap Rate = Net Operating Income (NOI) ÷ Current Market Value
For example, if a property generates $100,000 in NOI and has a market value of $2,000,000, the cap rate would be:
$100,000 ÷ $2,000,000 = 0.05 or 5.00%
This calculation provides a percentage, which represents the property’s potential return on investment.