How to Calculate Cap Rate for Multi Family

Multi-Family Cap Rate Calculator

Calculation Results:

Effective Gross Income:

Net Operating Income (NOI):

Capitalization Rate (Cap Rate)

function calculateCapRate() { var price = parseFloat(document.getElementById('propertyValue').value); var grossIncome = parseFloat(document.getElementById('grossIncome').value); var vacancy = parseFloat(document.getElementById('vacancyRate').value) / 100; var expenses = parseFloat(document.getElementById('operatingExpenses').value); if (isNaN(price) || isNaN(grossIncome) || isNaN(vacancy) || isNaN(expenses) || price <= 0) { alert("Please enter valid positive numbers for all fields."); return; } var egi = grossIncome * (1 – vacancy); var noi = egi – expenses; var capRate = (noi / price) * 100; document.getElementById('resEGI').innerText = "$" + egi.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); document.getElementById('resNOI').innerText = "$" + noi.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); document.getElementById('resCapRate').innerText = capRate.toFixed(2) + "%"; document.getElementById('resultsArea').style.display = "block"; }

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Understanding Cap Rate for Multi-Family Properties

In real estate investing, the Capitalization Rate, or "Cap Rate," is one of the most vital metrics for evaluating a multi-family property. It represents the expected annual rate of return on an investment property based on the income the property is expected to generate.

The Multi-Family Cap Rate Formula

The formula for calculating the cap rate is straightforward:

Cap Rate = (Net Operating Income / Property Purchase Price) x 100

Key Components Explained

• Gross Rental Income: The total potential income if all units are occupied and all tenants pay rent.
• Vacancy Rate: An allowance for the time units sit empty or for "bad debt" (uncollected rent). In multi-family analysis, a 5% to 10% vacancy rate is common for conservative estimates.
• Net Operating Income (NOI): This is your bottom line after all operating expenses are paid, but before debt service (mortgage payments) or taxes. It includes repairs, insurance, property management, and utilities.
• Property Value/Price: The acquisition cost or the current market value of the multi-family asset.

What is a "Good" Cap Rate for Multi-Family?

There is no single "perfect" cap rate. Generally, a higher cap rate implies higher risk but higher potential return. Conversely, a lower cap rate usually indicates a lower-risk property in a "Class A" location with higher demand. Most multi-family investors look for cap rates between 4% and 10% depending on the market cycle and property condition.

Example Calculation

Imagine you are looking at a 10-unit apartment building priced at $2,000,000. The total annual rent is $240,000. With a 5% vacancy rate ($12,000 loss) and annual operating expenses of $80,000:

1. Calculate Effective Gross Income: $240,000 – $12,000 = $228,000
2. Calculate NOI: $228,000 – $80,000 = $148,000
3. Calculate Cap Rate: ($148,000 / $2,000,000) = 7.4%

Why Debt is Excluded

A common mistake is including mortgage payments in the cap rate calculation. Cap rate is designed to measure the property's performance independent of how it is financed. This allows investors to compare properties "apples-to-apples" regardless of whether one buyer uses 100% cash and another uses a high-leverage loan.