When it comes to real estate investing, one metric that savvy investors swear by is the Capitalization Rate, or Cap Rate. At Pravin Realty, we help clients decode such metrics so they can make smarter, more profitable decisions.
✅ What is Cap Rate?
The Cap Rate is a real estate investment metric that shows the expected return on a property. It’s expressed as a percentage and gives you a clear idea of whether a property is worth the investment.
✅ How to Calculate Cap Rate
The formula is simple:
Cap Rate = (Net Operating Income / Property Value) x 100
So, if a property earns ₹5 lakhs annually and is worth ₹1 crore:
Cap Rate = (5,00,000 / 1,00,00,000) x 100 = 5%
✅ Cap Rate vs ROI
While both Cap Rate and ROI (Return on Investment) measure profitability, they differ:
- Cap Rate focuses on the property’s income-generating potential.
- ROI includes factors like financing, appreciation, and tax benefits.
Investors use Cap Rate for quick, upfront comparisons between properties.
✅ Importance of Cap Rate in Real Estate
- Helps assess investment risk
- Useful for property comparison
- Indicates market trends
- Aids in valuation decisions
Looking to invest? Pravin Realty provides accurate Cap Rate evaluations on our featured properties to help you invest wisely.
✅ What’s a Good Cap Rate?
- 4%–6%: Common in metro cities (stable but low returns)
- 7%–10%: Found in emerging markets (higher returns but higher risk)
The “best” Cap Rate depends on your risk appetite, investment goals, and location.
✅ Cap Rate Formula Explained (In Detail)
Step 1: Calculate Net Operating Income (NOI):
= Total Rental Income – Operating Expenses
Step 2: Divide by the current market value of the property
Step 3: Multiply by 100 to get the percentage
Example:
Rental Income: ₹10 lakhs
Expenses: ₹2 lakhs
NOI = ₹8 lakhs
Property Value = ₹1.5 crores
Cap Rate = (8,00,000 / 1,50,00,000) × 100 = 5.33%
✅ Other Real Estate Investment Metrics
- Cash-on-Cash Return
- Gross Rent Multiplier
- Internal Rate of Return (IRR)
- Price-to-Rent Ratio
While Cap Rate is great for a quick overview, combining it with other metrics ensures a solid investment plan.