Unexpectedly Intriguing!
18 July 2006

Harrison Loke of Finandom recently reviewed an article by Otesa Middleton Miles on the Bankrate.com web site, which looked at the math that real estate investors should do when making investment decisions. The math behind determining a property's capitalization rate caught our eye and has inspired our latest tool!

The capitalization rate for a real estate investment property is the ratio of annual net rental income received for the property divided by its purchase price, which is expressed as a percentage. It's useful in that it allows an investor to compare potential real estate investments by property values independently of how the financing for the properties being considered would be structured (amount of down payment, interest rates, closing costs, etc.)

Here's the data you'll need to use the tool:

  • Annual rental income.
  • Annual operating expenses (not including mortgage payments.)
  • The property's purchase price.

And that's all! Here's the tool:

Real Estate Investment Data
Input Data Values
Annual Rental Income ($USD)
Annual Rental Operating Expenses ($USD)
Property Purchase Price ($USD)

Net Rental Income and Capitalization Rate
Calculated Results Values
Net Rental Income ($USD)
Capitalization Rate (%)
Years to Recoup Property Value at Constant Rent Level

How To Use the Capitalization Rate as an Investor

The article quotes real estate investor Doug Crowe for how an investor would use this information:

If you're selling a property, says Crowe, "It's better to have a buyer willing to accept a lower cap rate. But if I'm buying, I want a high cap rate." For instance, if you buy a property with a cap rate of 8 percent and did nothing to it but raise the price, the cap rate drops to 7 percent. You've made a profit.

The article notes that capitalization rates of 7-8% are common in the midwest region of the U.S., while 6% is common on the coasts.

Previously on Political Calculations

Labels: , ,

About Political Calculations

Welcome to the blogosphere's toolchest! Here, unlike other blogs dedicated to analyzing current events, we create easy-to-use, simple tools to do the math related to them so you can get in on the action too! If you would like to learn more about these tools, or if you would like to contribute ideas to develop for this blog, please e-mail us at:

ironman at politicalcalculations.com

Thanks in advance!

Recent Posts

Stock Charts and News

Most Popular Posts
Quick Index

Site Data

This site is primarily powered by:

This page is powered by Blogger. Isn't yours?

CSS Validation

Valid CSS!

RSS Site Feed

AddThis Feed Button


The tools on this site are built using JavaScript. If you would like to learn more, one of the best free resources on the web is available at W3Schools.com.

Other Cool Resources

Blog Roll

Market Links

Useful Election Data
Charities We Support
Shopping Guides
Recommended Reading
Recently Shopped

Seeking Alpha Certified

Legal Disclaimer

Materials on this website are published by Political Calculations to provide visitors with free information and insights regarding the incentives created by the laws and policies described. However, this website is not designed for the purpose of providing legal, medical or financial advice to individuals. Visitors should not rely upon information on this website as a substitute for personal legal, medical or financial advice. While we make every effort to provide accurate website information, laws can change and inaccuracies happen despite our best efforts. If you have an individual problem, you should seek advice from a licensed professional in your state, i.e., by a competent authority with specialized knowledge who can apply it to the particular circumstances of your case.