Rental Property Cap Rate Calculator
What is a Capitalization Rate (Cap Rate)?
The Capitalization Rate, or Cap Rate, is a fundamental metric used in real estate to evaluate the profitability and potential return on an investment property. It represents the yield of a property over a one-year time horizon assuming the asset is purchased for cash (no mortgage debt).
Investors use the Cap Rate to compare different real estate opportunities quickly. A higher cap rate generally implies a higher potential return but also suggests higher risk, while a lower cap rate indicates a safer investment with lower yield.
How to Calculate Cap Rate
The formula for calculating Cap Rate is straightforward:
Cap Rate = (Net Operating Income / Current Market Value) × 100
To find your Net Operating Income (NOI), you must subtract all operating expenses from your total annual income. Operating expenses include property taxes, insurance, maintenance, property management fees, and utilities. Note that NOI does not include mortgage interest or principal payments.
Real-World Example
Let's say you are looking at a multi-family property with the following details:
- Purchase Price: $1,000,000
- Monthly Rent: $8,000 ($96,000 per year)
- Annual Expenses: $30,000 (Taxes, Insurance, Maintenance)
First, calculate the NOI: $96,000 – $30,000 = $66,000.
Next, divide the NOI by the purchase price: $66,000 / $1,000,000 = 0.066.
Multiply by 100 to get the percentage: 6.6% Cap Rate.
What is a "Good" Cap Rate?
There is no single "good" cap rate, as it depends heavily on the location (market) and asset type. In high-demand metropolitan areas like New York or San Francisco, cap rates might be as low as 3-4%. In smaller, emerging markets, investors might look for 7-10%. Generally, most residential real estate investors target a range between 5% and 8%.