Property Cap Rate Calculator
Calculate the Capitalization Rate for Real Estate Investments
Investment Summary
How to Calculate Cap Rate of a Property
In real estate, the Capitalization Rate (or Cap Rate) is the most popular metric used to compare the profitability and return potential of different investment properties. It represents the yield of a property over a one-year time horizon assuming the property is purchased with cash.
The Cap Rate Formula
To find the cap rate, you divide the Net Operating Income (NOI) by the current market value or purchase price of the property.
Step 1: Calculate Net Operating Income (NOI)
NOI is the total income generated by the property minus all necessary operating expenses. Note: This does not include mortgage payments, capital expenditures, or income taxes.
- Gross Income: Total rent collected plus other income (laundry, parking).
- Operating Expenses: Property management, insurance, taxes, maintenance, and utilities.
Step 2: Determine Market Value
This is either the price you are planning to pay for the property or the current appraised value if you already own it.
Real-World Example
Imagine you are looking at a small apartment building with the following financials:
- Purchase Price: $1,200,000
- Annual Rent Collected: $150,000
- Annual Expenses (Taxes, Repairs, etc.): $40,000
Calculation:
- NOI = $150,000 – $40,000 = $110,000
- Cap Rate = ($110,000 / $1,200,000) × 100 = 9.17%
What is a "Good" Cap Rate?
A "good" cap rate depends entirely on the market and the property type. Generally, a higher cap rate (8-12%) indicates higher potential return but often comes with higher risk or a property in a less desirable location. A lower cap rate (4-6%) usually suggests a safer investment in a high-demand "A-class" neighborhood.