Cap Rate Calculator
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Includes taxes, insurance, maintenance, management fees (excludes mortgage).
Effective Gross Income:
$0.00
Net Operating Income (NOI):
$0.00
Capitalization Rate (Cap Rate):
0.00%
Understanding Capitalization Rate in Real Estate
The Capitalization Rate, commonly referred to as the Cap Rate, is one of the most fundamental metrics used by real estate investors to evaluate the profitability and return potential of an investment property. Unlike other metrics that might factor in financing (like Cash on Cash Return), the Cap Rate looks purely at the property's ability to generate natural income relative to its market value.
The Formula:
Cap Rate = (Net Operating Income / Current Market Value) × 100
Cap Rate = (Net Operating Income / Current Market Value) × 100
How to Calculate Cap Rate
Calculating the Cap Rate involves three main steps to ensure you are getting an accurate picture of the asset's performance:
- Determine Gross Income: Calculate the total annual rental income the property generates if fully occupied.
- Adjust for Vacancy: Subtract a realistic vacancy allowance (typically 5-10%) to find the Effective Gross Income.
- Subtract Operating Expenses: Deduct all costs required to run the property, such as property taxes, insurance, maintenance, repairs, and property management fees. Note: Do not subtract mortgage payments or capital expenditures. This gives you the Net Operating Income (NOI).
- Divide by Value: Divide the NOI by the property's purchase price (or current market value) to get the Cap Rate percentage.
What is a "Good" Cap Rate?
There is no single number that defines a "good" cap rate, as it varies significantly by location, asset class, and economic environment. Generally:
- 4% to 5%: Common in high-demand, low-risk areas (like downtown NYC or San Francisco). These properties usually appreciate well but offer lower immediate cash flow.
- 6% to 8%: Often considered a healthy balance between risk and return in suburban markets or stabilizing neighborhoods.
- 10%+: typically found in higher-risk areas or rural markets where property values are lower, but management intensity might be higher.
Real-Life Example
Imagine you are looking at a duplex listed for $250,000.
- The property rents for $2,500/month, totaling $30,000/year in Gross Income.
- You estimate a 5% vacancy rate ($1,500), leaving an Effective Gross Income of $28,500.
- Annual expenses (taxes, insurance, repairs) total $8,500.
- Your Net Operating Income (NOI) is $28,500 – $8,500 = $20,000.
Your Cap Rate would be: ($20,000 / $250,000) = 0.08 or 8.0%.
This calculator helps you perform this math instantly to compare multiple properties side-by-side efficiently.