Cap Rate Calculator
Analyze the profitability of your real estate investment instantly.
Estimated Cap Rate:
Net Operating Income (NOI): $0.00
Monthly Income: $0.00
How to Calculate Cap Rate on a Rental Property
The Capitalization Rate (Cap Rate) is one of the most vital metrics for real estate investors. It helps evaluate the profitability and return potential of an investment property without considering financing or mortgage costs. It represents the yield of a property over a one-year time horizon.
The Cap Rate Formula
Cap Rate = (Net Operating Income / Current Market Value) × 100
Step-by-Step Calculation Guide
- Determine Gross Annual Income: This is the total rent you collect from tenants over 12 months, plus other income like laundry or parking fees.
- Calculate Operating Expenses: Subtract costs such as property taxes, insurance, maintenance, property management fees, and utilities. Note: Do not include mortgage payments or depreciation.
- Find the Net Operating Income (NOI): Subtract your annual expenses from your gross annual income.
- Divide by Property Value: Divide the NOI by the current market price or purchase price of the property.
Real-World Example
Imagine you are looking at a multi-family property with the following financials:
- Purchase Price: $800,000
- Monthly Rent: $6,000 ($72,000 per year)
- Annual Expenses: $18,000 (Taxes, Insurance, Repairs)
The Math:
NOI = $72,000 – $18,000 = $54,000.
Cap Rate = ($54,000 / $800,000) = 0.0675 or 6.75%.
What is a Good Cap Rate?
A "good" cap rate depends on the market and property type. Generally, a higher cap rate (8-10%) indicates higher risk but higher potential return. A lower cap rate (4-6%) usually signifies a safer investment in a high-demand area. Factors like location, property condition, and market trends heavily influence what investors consider an acceptable cap rate.