body {
font-family: -apple-system, BlinkMacSystemFont, "Segoe UI", Roboto, Helvetica, Arial, sans-serif;
line-height: 1.6;
color: #333;
max-width: 800px;
margin: 0 auto;
padding: 20px;
}
.calc-container {
background-color: #f8f9fa;
border: 1px solid #e9ecef;
border-radius: 8px;
padding: 30px;
margin-bottom: 40px;
box-shadow: 0 4px 6px rgba(0,0,0,0.05);
}
.calc-title {
text-align: center;
margin-top: 0;
color: #2c3e50;
margin-bottom: 25px;
}
.form-group {
margin-bottom: 20px;
}
.form-row {
display: flex;
flex-wrap: wrap;
gap: 20px;
}
.col-half {
flex: 1;
min-width: 250px;
}
label {
display: block;
margin-bottom: 8px;
font-weight: 600;
color: #495057;
}
input[type="number"] {
width: 100%;
padding: 12px;
border: 1px solid #ced4da;
border-radius: 4px;
font-size: 16px;
box-sizing: border-box;
}
input[type="number"]:focus {
border-color: #4dabf7;
outline: none;
box-shadow: 0 0 0 3px rgba(77, 171, 247, 0.2);
}
.btn-calc {
display: block;
width: 100%;
padding: 15px;
background-color: #007bff;
color: white;
border: none;
border-radius: 4px;
font-size: 18px;
font-weight: bold;
cursor: pointer;
transition: background-color 0.2s;
margin-top: 10px;
}
.btn-calc:hover {
background-color: #0056b3;
}
#results-area {
margin-top: 30px;
padding: 20px;
background-color: #fff;
border-radius: 6px;
border-left: 5px solid #28a745;
display: none;
}
.result-row {
display: flex;
justify-content: space-between;
margin-bottom: 10px;
padding-bottom: 10px;
border-bottom: 1px solid #eee;
}
.result-row:last-child {
border-bottom: none;
margin-bottom: 0;
padding-bottom: 0;
}
.result-label {
font-weight: 600;
color: #555;
}
.result-value {
font-weight: bold;
color: #2c3e50;
}
.highlight-value {
color: #28a745;
font-size: 1.2em;
}
.content-section h2 {
color: #2c3e50;
border-bottom: 2px solid #eee;
padding-bottom: 10px;
margin-top: 40px;
}
.content-section h3 {
color: #34495e;
margin-top: 25px;
}
.content-section p {
margin-bottom: 15px;
}
.example-box {
background-color: #eef7ff;
padding: 15px;
border-radius: 6px;
border: 1px solid #b8daff;
margin: 20px 0;
}
@media (max-width: 600px) {
.form-row {
flex-direction: column;
gap: 0;
}
.col-half {
margin-bottom: 20px;
}
}
Understanding Capitalization Rate (Cap Rate)
The Capitalization Rate, or Cap Rate, is one of the most fundamental metrics used in real estate investing to evaluate the profitability and potential return of an investment property. Unlike a simple cash flow calculation, the Cap Rate measures the rate of return on the property based on the income the property is expected to generate, independent of financing methods.
How is Cap Rate Calculated?
The formula for calculating Cap Rate is relatively straightforward but requires accurate inputs regarding the property's income and expenses. The formula is:
Cap Rate = (Net Operating Income / Property Asset Value) × 100
To use this formula correctly, you must understand the components:
- Net Operating Income (NOI): This is your annual rental income minus all operating expenses (taxes, insurance, maintenance, property management, and vacancy losses). Crucially, mortgage payments are NOT included in NOI.
- Property Asset Value: This is essentially the purchase price of the property or its current market value.
Why is Cap Rate Important?
Cap Rate allows investors to compare properties "apples to apples" without the distortion of mortgage financing. Since financing terms vary from person to person (down payment size, interest rates), excluding debt service allows you to see the raw earning power of the asset itself.
Typically, a higher Cap Rate indicates a higher potential return, but often comes with higher risk (e.g., a property in a declining neighborhood might have a high cap rate because the price is low). Conversely, a lower Cap Rate often implies a safer, more stable investment in a high-demand area where property prices are high relative to rent.
Real-World Example
The Scenario:
Imagine you are looking at a duplex listed for $300,000.
- Gross Rent: Each unit rents for $1,500/month. Total monthly rent is $3,000.
- Annual Gross Income: $3,000 × 12 = $36,000.
- Vacancy Loss (5%): $36,000 × 0.05 = $1,800.
- Operating Expenses: Property taxes ($4,000), Insurance ($1,200), Maintenance ($2,000) = $7,200.
The Calculation:
First, calculate the NOI:
$36,000 (Gross) – $1,800 (Vacancy) – $7,200 (Expenses) = $27,000 NOI
Next, divide NOI by Price:
$27,000 / $300,000 = 0.09
Result: The Cap Rate is 9.0%.
What is a "Good" Cap Rate?
There is no single answer, as acceptable Cap Rates vary by market and property type. However, historically:
- 4% – 5%: Common in high-demand, low-risk areas (like downtown NYC or San Francisco).
- 6% – 8%: Often considered a healthy balance of risk and return for residential rentals in stable suburbs.
- 8% – 12%+: Typically found in older neighborhoods or rural areas where risk is higher, or appreciation potential is lower.
Use this calculator to quickly screen properties. If a seller asks for a price that results in a 3% Cap Rate, but the market average is 7%, the property is likely overpriced relative to its income-generating potential.
function calculateCapRate() {
// 1. Get Input Values
var purchasePrice = parseFloat(document.getElementById('purchasePrice').value);
var monthlyRent = parseFloat(document.getElementById('monthlyRent').value);
var vacancyRate = parseFloat(document.getElementById('vacancyRate').value);
var annualExpenses = parseFloat(document.getElementById('annualExpenses').value);
// 2. Validation
if (isNaN(purchasePrice) || purchasePrice <= 0) {
alert("Please enter a valid Purchase Price.");
return;
}
if (isNaN(monthlyRent) || monthlyRent < 0) {
alert("Please enter a valid Monthly Rent.");
return;
}
if (isNaN(annualExpenses) || annualExpenses < 0) {
alert("Please enter valid Annual Expenses.");
return;
}
// Handle vacancy rate defaults if empty
if (isNaN(vacancyRate)) {
vacancyRate = 0;
}
// 3. Perform Calculations
// Annual Gross Scheduled Income
var annualGrossIncome = monthlyRent * 12;
// Calculate Vacancy Loss in Dollars
var vacancyLoss = annualGrossIncome * (vacancyRate / 100);
// Effective Gross Income
var effectiveGrossIncome = annualGrossIncome – vacancyLoss;
// Net Operating Income (NOI)
var noi = effectiveGrossIncome – annualExpenses;
// Cap Rate Calculation: (NOI / Purchase Price) * 100
var capRate = (noi / purchasePrice) * 100;
// 4. Update UI
// Format currency numbers
var formatter = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
minimumFractionDigits: 2
});
document.getElementById('resGrossIncome').innerText = formatter.format(annualGrossIncome);
document.getElementById('resEffectiveIncome').innerText = formatter.format(effectiveGrossIncome);
document.getElementById('resNOI').innerText = formatter.format(noi);
document.getElementById('resCapRate').innerText = capRate.toFixed(2) + "%";
// Show results area
document.getElementById('results-area').style.display = 'block';
}