function calculateCapRate() {
// Get input values
var price = document.getElementById("propertyPrice").value;
var grossIncome = document.getElementById("annualGrossIncome").value;
var vacancyRate = document.getElementById("vacancyRate").value;
var expenses = document.getElementById("annualExpenses").value;
// Validate inputs
if (price === "" || grossIncome === "" || expenses === "") {
alert("Please enter the Purchase Price, Gross Income, and Expenses.");
return;
}
var numPrice = parseFloat(price);
var numGrossIncome = parseFloat(grossIncome);
var numVacancyRate = parseFloat(vacancyRate);
var numExpenses = parseFloat(expenses);
if (isNaN(numVacancyRate)) {
numVacancyRate = 0; // Default to 0 if empty
}
if (numPrice <= 0) {
alert("Property Price must be greater than zero.");
return;
}
// Calculation Logic
// 1. Calculate Vacancy Loss
var vacancyLoss = numGrossIncome * (numVacancyRate / 100);
// 2. Calculate Effective Gross Income
var effectiveGrossIncome = numGrossIncome – vacancyLoss;
// 3. Calculate Net Operating Income (NOI)
var noi = effectiveGrossIncome – numExpenses;
// 4. Calculate Cap Rate
// Formula: (NOI / Property Value) * 100
var capRate = (noi / numPrice) * 100;
// Display Results
document.getElementById("displayGross").innerText = "$" + numGrossIncome.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById("displayVacancyLoss").innerText = "-$" + vacancyLoss.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById("displayExpenses").innerText = "-$" + numExpenses.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById("displayNOI").innerText = "$" + noi.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2});
// Handle display color for negative NOI
if (noi < 0) {
document.getElementById("displayNOI").style.color = "red";
} else {
document.getElementById("displayNOI").style.color = "#333";
}
document.getElementById("displayCapRate").innerText = capRate.toFixed(2) + "%";
// Show result box
document.getElementById("resultBox").style.display = "block";
}
Understanding the Excel Cap Rate Calculator
The Capitalization Rate, commonly known as the Cap Rate, is one of the most fundamental metrics in real estate investing. It allows investors to assess the profitability and return potential of an investment property independent of financing. Whether you are using a sophisticated Excel spreadsheet or an online tool like the one above, understanding the mechanics of this calculation is crucial for making informed investment decisions.
What is Cap Rate?
The Cap Rate measures the annual rate of return on a real estate investment property based on the income the property is expected to generate. It essentially answers the question: "If I paid all cash for this property, what percentage return would I make in the first year?"
Because it ignores financing (mortgages), the Cap Rate is excellent for comparing the relative value of different properties, regardless of how they are purchased.
The Cap Rate Formula
The formula for calculating Cap Rate is straightforward but requires accurate inputs to be effective:
Cap Rate = (Net Operating Income / Property Value) × 100
Key Components:
Net Operating Income (NOI): This is your revenue minus all operating expenses. It includes rental income and other fees (like parking or laundry) minus costs like taxes, insurance, maintenance, and management fees. Note: NOI does not include mortgage payments.
Property Value: This is typically the current market value or the purchase price of the asset.
How to Create a Cap Rate Calculator in Excel
Many investors prefer using Excel for their calculations because it allows for saving data and modeling different scenarios. Here is how you can set up your own Cap Rate calculator in Microsoft Excel or Google Sheets.
Step 1: Set up your Input Cells
Label the following cells in Column A, and enter your data in Column B:
A1: Purchase Price
A2: Annual Gross Income
A3: Vacancy Rate (%)
A4: Annual Operating Expenses
Step 2: Calculate Effective Gross Income
In cell A5, label it "Effective Income". In B5, enter this formula to account for vacancy loss:
=B2 * (1 – B3)
Step 3: Calculate Net Operating Income (NOI)
In cell A6, label it "NOI". In B6, subtract expenses from effective income:
=B5 – B4
Step 4: Calculate Cap Rate
In cell A7, label it "Cap Rate". In B7, divide NOI by the Price:
=B6 / B1
Tip: Format cell B7 as a percentage to see the result clearly (e.g., 5.5%).
What is a "Good" Cap Rate?
There is no single answer to what constitutes a "good" cap rate, as it depends heavily on the risk associated with the property and the current market environment. However, general guidelines suggest:
4% to 5%: Often found in low-risk, high-demand areas (like downtown in major cities). These properties usually appreciate well but offer lower immediate cash flow.
6% to 8%: Considered a balanced return for stable residential or commercial properties in moderate markets.
8% to 10%+: Generally associated with higher risk properties, potentially in declining neighborhoods or rural areas, or properties requiring significant renovation.
Always remember that a higher Cap Rate implies higher risk. If a property lists a 12% Cap Rate, investigate thoroughly to ensure there aren't hidden deferred maintenance costs or high tenant turnover issues.
Why NOI is Critical
The accuracy of your Cap Rate calculation depends entirely on the accuracy of your Net Operating Income (NOI). Many sellers might inflate the Cap Rate by underestimating expenses (ignoring property management fees or maintenance reserves). When using this calculator, be sure to include all likely expenses to get a realistic view of the investment's potential.