Cap Rate Calculator
Calculate the potential return on your real estate investment.
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$
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Includes taxes, insurance, maintenance (exclude mortgage).
%
Capitalization Rate (Cap Rate)
0.00%
Net Operating Income (NOI)
$0.00
Effective Gross Income
$0.00
Total Annual Expenses
$0.00
What is Capitalization Rate (Cap Rate)?
The Capitalization Rate, commonly referred to as Cap Rate, is one of the most fundamental metrics used in commercial and residential real estate investing. It measures the expected rate of return on an investment property based on the income the property is expected to generate.
Essentially, the Cap Rate helps investors compare the profitability of different properties independently of how they are financed. A higher cap rate generally implies a higher potential return, but often comes with higher risk.
How to Calculate Cap Rate
The formula for calculating Cap Rate is relatively straightforward but requires accurate data regarding the property's income and expenses.
Cap Rate = (Net Operating Income / Current Market Value) × 100
To use this formula, you must first determine the Net Operating Income (NOI):
- Gross Income: Total annual rental income if fully occupied.
- Vacancy Loss: Estimated income lost due to vacancies (usually 5-10%).
- Operating Expenses: Costs to run the property (taxes, insurance, management fees, maintenance). Note: Do not include mortgage payments in NOI.
Example Calculation
Let's say you are looking at a single-family rental property listed for $300,000.
- Monthly Rent: $2,500 ($30,000 annually)
- Vacancy Rate: 5% ($1,500 loss)
- Effective Gross Income: $28,500
- Annual Expenses: $9,000 (Property tax, insurance, repairs)
First, calculate NOI: $28,500 – $9,000 = $19,500.
Next, divide by the property value: $19,500 / $300,000 = 0.065.
Finally, multiply by 100 to get the percentage: 6.5% Cap Rate.
What is a Good Cap Rate?
There is no single "good" Cap Rate, as it depends heavily on the market and the asset class. However, general benchmarks include:
- 4% to 5%: Common in high-demand, low-risk areas (e.g., downtown NYC or San Francisco).
- 6% to 8%: Often considered a healthy balance of risk and return for residential rentals in stable suburban markets.
- 8% to 12%+: Found in riskier markets or properties requiring significant renovation (value-add opportunities).