function calculateCapRate() {
// Get input values
var price = parseFloat(document.getElementById('propertyPrice').value);
var monthlyRent = parseFloat(document.getElementById('monthlyRent').value);
var vacancyRate = parseFloat(document.getElementById('vacancyRate').value) || 0;
var managementFeePct = parseFloat(document.getElementById('managementFee').value) || 0;
var annualTax = parseFloat(document.getElementById('annualTax').value) || 0;
var annualInsurance = parseFloat(document.getElementById('annualInsurance').value) || 0;
var annualMaintenance = parseFloat(document.getElementById('annualMaintenance').value) || 0;
var otherCosts = parseFloat(document.getElementById('otherCosts').value) || 0;
// Validation
if (isNaN(price) || price <= 0) {
alert("Please enter a valid Property Purchase Price.");
return;
}
if (isNaN(monthlyRent) || monthlyRent <= 0) {
alert("Please enter a valid Monthly Rental Income.");
return;
}
// Calculate Gross Annual Income
var potentialGrossIncome = monthlyRent * 12;
// Calculate Vacancy Loss
var vacancyLoss = potentialGrossIncome * (vacancyRate / 100);
// Effective Gross Income
var effectiveGrossIncome = potentialGrossIncome – vacancyLoss;
// Calculate Operating Expenses
// Management fee is usually calculated on Effective Gross Income (collected rent)
var managementCost = effectiveGrossIncome * (managementFeePct / 100);
var totalExpenses = annualTax + annualInsurance + annualMaintenance + otherCosts + managementCost;
// Calculate Net Operating Income (NOI)
var noi = effectiveGrossIncome – totalExpenses;
// Calculate Cap Rate
var capRate = (noi / price) * 100;
// Display Results
document.getElementById('displayGrossIncome').innerText = "$" + potentialGrossIncome.toLocaleString('en-US', {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('displayExpenses').innerText = "$" + (totalExpenses + vacancyLoss).toLocaleString('en-US', {minimumFractionDigits: 2, maximumFractionDigits: 2}) + " (incl. vacancy loss)";
document.getElementById('displayNOI').innerText = "$" + noi.toLocaleString('en-US', {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('displayCapRate').innerText = capRate.toFixed(2) + "%";
// Show result box
document.getElementById('resultBox').style.display = 'block';
}
What is Cap Rate and Why Does it Matter?
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 other metrics that might factor in mortgage financing, the Cap Rate looks purely at the property's ability to generate revenue in relation to its purchase price, assuming an all-cash purchase.
Essentially, the Cap Rate answers the question: "If I paid all cash for this property today, what percentage return would I get on my money every year?" This makes it an excellent tool for comparing different properties side-by-side, regardless of how they are financed.
How to Calculate Cap Rate
The formula for calculating Cap Rate is relatively straightforward, but it requires accurate data regarding the property's income and expenses. The formula is:
Cap Rate = (Net Operating Income / Current Market Value) × 100
Step 1: Determine Gross Income
Start with the total annual rental income the property generates. If the property is currently vacant, you can estimate this based on market rates for similar properties in the area.
Step 2: Subtract Operating Expenses
To find the Net Operating Income (NOI), you must subtract all operating expenses from the gross income. Common operating expenses include:
Property Taxes
Insurance premiums
Property management fees
Maintenance and repairs
Utilities (paid by the landlord)
Vacancy allowance (money set aside for periods without tenants)
Note: Mortgage payments (principal and interest) are NOT included in the NOI calculation.
Step 3: Divide by Property Value
Finally, divide the NOI by the current market value or the purchase price of the property to get a decimal, then multiply by 100 to get the percentage.
What is a "Good" Cap Rate?
There is no single "good" Cap Rate that applies to every investor or every market. Generally, a higher Cap Rate implies a higher return on investment, but it often comes with higher risk. Conversely, a lower Cap Rate often indicates a safer asset in a high-demand area with lower potential returns.
4% – 5%: Typical for Class A properties in hot markets (e.g., NYC, San Francisco). These are low-risk but offer lower immediate cash flow.
6% – 8%: Often considered a healthy balance between risk and return in many suburban markets.
8% – 12%+: Common in older properties or riskier neighborhoods (Class C or D). While the return looks high on paper, maintenance costs and tenant turnover may vary significantly.
Example Calculation
Let's say you are looking at a duplex listed for $500,000.
Gross Income: The two units rent for $2,500/month total, or $30,000 per year.
Expenses: After taxes, insurance, and maintenance, your annual costs are $10,000.
Using our calculator above, you can quickly adjust these variables to see how changes in rent or maintenance costs impact the viability of your investment.