How to Calculate Cap Rate Rental

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Rental Property Cap Rate Calculator

Results

Annual Net Operating Income (NOI)
$0.00
Capitalization Rate
0.00%
function calculateCapRate() { var propertyValue = parseFloat(document.getElementById('propertyValue').value); var monthlyRent = parseFloat(document.getElementById('monthlyRent').value); var annualTaxes = parseFloat(document.getElementById('annualTaxes').value) || 0; var annualInsurance = parseFloat(document.getElementById('annualInsurance').value) || 0; var monthlyMaintenance = parseFloat(document.getElementById('monthlyMaintenance').value) || 0; var vacancyRate = parseFloat(document.getElementById('vacancyRate').value) || 0; if (isNaN(propertyValue) || propertyValue <= 0 || isNaN(monthlyRent) || monthlyRent <= 0) { alert('Please enter valid numbers for Property Value and Monthly Rent.'); return; } var annualGrossPotentialIncome = monthlyRent * 12; var vacancyLoss = annualGrossPotentialIncome * (vacancyRate / 100); var effectiveRentalIncome = annualGrossPotentialIncome – vacancyLoss; var annualOperatingExpenses = annualTaxes + annualInsurance + (monthlyMaintenance * 12); var netOperatingIncome = effectiveRentalIncome – annualOperatingExpenses; var capRate = (netOperatingIncome / propertyValue) * 100; document.getElementById('noiDisplay').innerText = '$' + netOperatingIncome.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); document.getElementById('capRateDisplay').innerText = capRate.toFixed(2) + '%'; document.getElementById('capRateResult').style.display = 'block'; }

How to Calculate Cap Rate for Rental Property

In real estate investing, the Capitalization Rate (Cap Rate) is a fundamental metric used to estimate the potential return on an investment property. It represents the yield of a property over a one-year time horizon, assuming the property is purchased with cash and not financed.

The Cap Rate Formula

The math behind a cap rate is straightforward:

Cap Rate = (Net Operating Income / Current Market Value) x 100

Step-by-Step Calculation Components

  1. Annual Gross Income: Sum up all rental income collected over 12 months. Remember to subtract a percentage for potential vacancy (usually 5-10%).
  2. Operating Expenses: These include property taxes, insurance, repairs, maintenance, and property management fees. Note: Do NOT include mortgage payments (debt service) or capital improvements.
  3. Net Operating Income (NOI): Subtract your annual operating expenses from your annual gross income.
  4. Divide by Value: Divide the NOI by the purchase price or current market value of the property.

Example Calculation

Suppose you are looking at a property with the following profile:

  • Purchase Price: $500,000
  • Monthly Rent: $4,000 ($48,000 per year)
  • Annual Expenses: $12,000 (Taxes, Insurance, Repairs)

Step 1: Calculate NOI. $48,000 – $12,000 = $36,000.
Step 2: Calculate Cap Rate. ($36,000 / $500,000) = 0.072.
Step 3: Convert to percentage. 0.072 x 100 = 7.2% Cap Rate.

Why Cap Rate Matters

Investors use cap rates to compare different investment opportunities quickly. A higher cap rate generally implies a higher potential return but also higher risk. Conversely, a lower cap rate often indicates a "safer" investment in a highly desirable location with more potential for property value appreciation.

It is important to remember that the cap rate does not account for leverage (mortgages), tax implications, or future appreciation, making it just one of several tools you should use to evaluate a deal.

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