Includes taxes, insurance, maintenance, management fees (excludes mortgage).
Please enter valid positive numbers for all fields.
Net Operating Income (NOI):$0.00
Capitalization Rate:0.00%
function calculateCapRate() {
var propertyVal = document.getElementById('propertyValue').value;
var grossIncome = document.getElementById('annualGrossIncome').value;
var expenses = document.getElementById('annualOperatingExpenses').value;
var errorDiv = document.getElementById('capError');
var resultBox = document.getElementById('capResultBox');
// Parse values
var valNum = parseFloat(propertyVal);
var incomeNum = parseFloat(grossIncome);
var expNum = parseFloat(expenses);
// Validation
if (isNaN(valNum) || isNaN(incomeNum) || isNaN(expNum) || valNum <= 0) {
errorDiv.style.display = "block";
resultBox.style.display = "none";
return;
}
errorDiv.style.display = "none";
// Logic: NOI = Income – Expenses
var noi = incomeNum – expNum;
// Logic: Cap Rate = (NOI / Property Value) * 100
var capRate = (noi / valNum) * 100;
// Formatting Output
var formattedNOI = noi.toLocaleString('en-US', {
style: 'currency',
currency: 'USD',
minimumFractionDigits: 2,
maximumFractionDigits: 2
});
var formattedCapRate = capRate.toFixed(2) + "%";
// Display Results
document.getElementById('displayNOI').innerHTML = formattedNOI;
document.getElementById('displayCapRate').innerHTML = formattedCapRate;
resultBox.style.display = "block";
}
How to Calculate a Cap Rate Value: A Complete Guide
The Capitalization Rate, or "Cap Rate," is widely considered the gold standard metric in commercial and residential real estate investing. Unlike metrics that consider financing (like Cash on Cash Return), the Cap Rate evaluates the raw profitability of a property based solely on its income-generating potential and its current market value.
Understanding how to calculate a cap rate value allows investors to compare apples-to-apples between different properties, regardless of how those properties are financed. Whether you are buying a duplex or a large apartment complex, the math remains the same.
The Cap Rate Formula
To calculate the cap rate, you need two critical figures: the Net Operating Income (NOI) and the Current Market Value (or purchase price) of the property.
Cap Rate = (Net Operating Income / Current Market Value) × 100
Step 1: Determine Net Operating Income (NOI)
The Net Operating Income is the total income the property generates annually after all operating expenses are paid, but before mortgage payments and income taxes. This is the most crucial step in the calculation.
Formula for NOI:Gross Rental Income – Operating Expenses = NOI
Operating Expenses Include:
Property Taxes
Property Insurance
Property Management Fees
Maintenance and Repairs
Utilities (paid by owner)
Vacancy Allowances
Operating Expenses Do NOT Include: Mortgage payments (principal and interest), capital expenditures (major renovations), or depreciation.
Step 2: Determine Market Value
If you are looking to buy a property, use the asking price or your intended offer price. If you already own the property, use the current appraised market value. This denominator in the equation represents the capital cost of the asset.
Real-World Example Calculation
Let's assume you are evaluating a small apartment building with the following financials:
There is no single "good" cap rate, as it depends heavily on the location, asset class, and risk level. Generally:
4% – 6%: Considered "Low." Often found in Class A properties in high-demand, low-risk areas (e.g., downtown New York or San Francisco). Prices are high relative to income, suggesting safety but lower immediate cash flow.
7% – 10%: Considered "Moderate to Good." Typical for balanced markets. Offers a reasonable mix of risk and return.
10%+: Considered "High." often indicates higher risk, older buildings, or properties in declining neighborhoods. While the return looks attractive, the risk of vacancy or major repairs is usually higher.
Why Use Cap Rate?
The primary advantage of the cap rate is that it removes the leverage factor. Two investors could buy the same building; one pays cash, and one takes a 90% loan. Their "Cash on Cash Return" would be wildly different, but the Cap Rate remains exactly the same because it measures the property's performance, not the financing structure.
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"@type": "Question",
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"text": "Cap rate is calculated by dividing the Net Operating Income (NOI) by the property's current market value or purchase price, then multiplying by 100 to get a percentage."
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"name": "Does cap rate include mortgage payments?",
"acceptedAnswer": {
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"text": "No. Cap rate calculations use Net Operating Income (NOI), which excludes debt service (mortgage payments). It is a measure of the property's unleveraged return."
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"name": "What is a good cap rate for rental property?",
"acceptedAnswer": {
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"text": "A 'good' cap rate is subjective and varies by market and risk tolerance. Generally, 4-6% is common for low-risk, high-value areas, while 8-12% is targeted for higher-risk or lower-cost markets."
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