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The Capitalization Rate:
The Cap Rate is calculated as follows:
Cap Rate = (Net Operating Income / Market Value) x 100
Cap Rate = (NOI / MV) x 100
Example:
Net Operating Income (NOI): \$239,430
Market Value (MV): \$3,420,000
Cap Rate = (239,430 / \$3,420,000) x 100
Cap Rate = 7%

The Cap Rate of 7% represents the annual return before mortgage payments and income taxes on the total investment of \$3,420,000.
Alternatively, if the Cap Rate can be established from comparables, we can determine the likely selling price of a property. For example, if the cap rate is 7.5 % based on comparables, and the Net Operating Income (NOI) for the building is \$105,000 , the potential selling price can be calculated as follows:
MV = (NOI / Cap Rate) x 100
MV = (105,000 / 7.5) x 100
MV = \$ 1,400,000

The Net Income Multiplier (NIM)

The Net Income Multiplier (NIM) is the inverse of the Cap Rate
NIM = 100 / Cap Rate
or Cap Rate = 100 / NIM
As an example, if the NIM is 11, the Cap Rate is:
Cap Rate = 100 / NIMCap Rate = 100 / 11 Cap Rate = 9.09%
Both the Cap Rate and its counterpart the Net Income Multiplier are used in the real estate industry to estimate the market value of a property. However, in recent times, the Cap Rate has become the more popular financial measure. Regardless of which measure is used; they both produce the same estimate of market value.

The Net Income Multiplier is expressed as follows:
Net Income Multiplier (NIM) = Market Value / Net Operating Income
i.e. NIM = MV / NOI
Example:
Net Operating Income: \$239,430
Market Value (MV): \$3,420,000
NIM = MV / NOI
NIM = 3,420,000 / 239,430
= 14.28

Alternatively, if the Net Income Multiplier can be established from comparables, we can determine the likely selling price of a property. For example, if the Net Income Multiplier is 7.0 based on several comparables, and the Net Operating Income for the building is \$180,000 , the potential selling price can be calculated as follows:
MV = NOI x NIM
MV = \$180,000 x 7
MV = \$1,260,000.
Cap Rate Calculator

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