Cap Rate Calculator
Annual Net Operating Income (NOI):
Capitalization Rate:
How to Calculate Cap Rate on Real Estate Investment
The Capitalization Rate, or "Cap Rate," is one of the most vital metrics for real estate investors. It measures the potential rate of return on an investment property based on the income it is expected to generate, independent of financing or mortgage considerations.
The Cap Rate Formula
To calculate the cap rate, you divide the Net Operating Income (NOI) by the Current Market Value of the property.
Cap Rate = (Net Operating Income / Current Market Value) x 100
Step-by-Step Breakdown
- Calculate Gross Income: Total all rental income and other revenue (like parking or laundry) generated by the property over a year.
- Subtract Operating Expenses: Subtract costs like property taxes, insurance, maintenance, and management fees. Note: Do NOT include mortgage payments (debt service) or capital improvements.
- Determine NOI: This is your Net Operating Income.
- Divide by Price: Divide the NOI by the purchase price or current value.
Suppose you purchase a multi-family duplex for $400,000.
– Gross Annual Rent: $48,000
– Annual Expenses (Taxes, Insurance, Repair): $12,000
– NOI = $36,000
– Cap Rate = ($36,000 / $400,000) = 9.0%
Why Cap Rate Matters
Cap rates allow investors to compare the profitability of different properties quickly. A higher cap rate usually suggests a higher potential return but often comes with higher risk (such as a property in a declining neighborhood). Conversely, a lower cap rate typically indicates a "safer" investment in a high-demand area.
By using this calculator, you can strip away the variables of financing (interest rates and down payments) to see how the asset performs purely as a cash-generating machine.