Calculate the Capitalization Rate and Net Operating Income (NOI) of your investment property.
Purchase & Income
Annual Expenses
Investment Analysis
Capitalization Rate (Cap Rate)
0.00%
Net Operating Income (NOI)
$0.00
Total Investment
$0.00
Effective Gross Income
$0.00
Total Operating Expenses
$0.00
What is Capitalization Rate (Cap Rate)?
The Capitalization Rate, or "Cap Rate," is one of the most fundamental metrics in real estate investing. It measures the natural rate of return on an investment property based on the income the property is expected to generate. The Cap Rate allows investors to compare the relative value of different real estate assets without considering mortgage financing, as it represents a cash purchase scenario.
Cap Rate is expressed as a percentage and essentially answers the question: "If I paid all cash for this property, what would my annual return be?"
How to Calculate Cap Rate
The formula for calculating Cap Rate is simple but requires accurate data regarding income and expenses. The formula is:
Cap Rate = (Net Operating Income / Current Market Value) × 100
Step-by-Step Calculation:
Calculate Gross Income: Sum all rental income and other income sources (laundry, parking, etc.).
Subtract Vacancy: Deduct a percentage for expected vacancy to get Effective Gross Income.
Calculate Operating Expenses: Sum all costs required to run the property (Taxes, Insurance, Repairs, Management). Note: Do not include mortgage payments (principal and interest) in Operating Expenses.
Determine Net Operating Income (NOI): Subtract Operating Expenses from Effective Gross Income.
Divide by Price: Divide the NOI by the property's purchase price (or total investment cost).
Example Calculation
Let's assume you are looking at a duplex listed for $500,000.
A "good" Cap Rate is subjective and depends heavily on the asset class and location. Generally:
4% – 5%: Common in high-demand, low-risk areas (e.g., Downtown NYC, San Francisco). These properties usually appreciate well but offer lower immediate cash flow.
6% – 8%: Often considered a healthy balance between risk and return in stabilized suburban markets.
8% – 12%+: Typical in older properties or higher-risk areas. While the return is higher, these properties often require more maintenance or have higher tenant turnover.
Cap Rate vs. Cash-on-Cash Return
It is crucial not to confuse Cap Rate with Cash-on-Cash Return. Cap Rate looks at the property's raw potential assuming an all-cash buy. Cash-on-Cash Return factors in your financing (mortgage) and measures the return on the actual cash you put into the deal (down payment + closing costs).
If you leverage your money with a loan, your Cash-on-Cash return might be higher or lower than the Cap Rate, depending on the interest rate.
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"@type": "Question",
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"text": "The formula for Cap Rate is Net Operating Income (NOI) divided by the Property Value (or Purchase Price), multiplied by 100 to get a percentage."
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}, {
"@type": "Question",
"name": "Does Cap Rate include mortgage payments?",
"acceptedAnswer": {
"@type": "Answer",
"text": "No. Cap Rate is a measure of unleveraged return. It calculates the return based on the property's income potential regardless of how it was financed. Mortgage payments (Debt Service) are not included in the calculation of Net Operating Income (NOI)."
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}, {
"@type": "Question",
"name": "Why is my Cap Rate different from my ROI?",
"acceptedAnswer": {
"@type": "Answer",
"text": "Cap Rate measures the property's efficiency, while ROI (Return on Investment) or Cash-on-Cash Return measures the efficiency of your specific cash investment, factoring in debt and leverage."
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function calculateCapRate() {
// 1. Get Input Values
var propertyPrice = parseFloat(document.getElementById('crcPropertyPrice').value);
var closingCosts = parseFloat(document.getElementById('crcClosingCosts').value);
var monthlyRent = parseFloat(document.getElementById('crcMonthlyRent').value);
var otherMonthlyIncome = parseFloat(document.getElementById('crcOtherIncome').value);
var vacancyRate = parseFloat(document.getElementById('crcVacancy').value);
var annualTax = parseFloat(document.getElementById('crcPropertyTax').value);
var annualInsurance = parseFloat(document.getElementById('crcInsurance').value);
var annualMaintenance = parseFloat(document.getElementById('crcMaintenance').value);
var mgmtFeePercent = parseFloat(document.getElementById('crcMgmtFee').value);
var annualOtherExp = parseFloat(document.getElementById('crcOtherExpenses').value);
// 2. Validation
// Handle defaults if fields are empty but allow calculation if main fields exist
if (isNaN(closingCosts)) closingCosts = 0;
if (isNaN(otherMonthlyIncome)) otherMonthlyIncome = 0;
if (isNaN(vacancyRate)) vacancyRate = 0;
if (isNaN(annualTax)) annualTax = 0;
if (isNaN(annualInsurance)) annualInsurance = 0;
if (isNaN(annualMaintenance)) annualMaintenance = 0;
if (isNaN(mgmtFeePercent)) mgmtFeePercent = 0;
if (isNaN(annualOtherExp)) annualOtherExp = 0;
if (isNaN(propertyPrice) || propertyPrice <= 0 || isNaN(monthlyRent) || monthlyRent <= 0) {
alert("Please enter a valid Property Price and Monthly Rental Income.");
return;
}
// 3. Calculation Logic
// Income
var grossPotentialMonthly = monthlyRent + otherMonthlyIncome;
var grossPotentialAnnual = grossPotentialMonthly * 12;
// Vacancy Loss
var vacancyLoss = grossPotentialAnnual * (vacancyRate / 100);
var effectiveGrossIncome = grossPotentialAnnual – vacancyLoss;
// Management Fee Calculation (usually based on Effective Gross Income or Collected Rent)
var annualMgmtFee = effectiveGrossIncome * (mgmtFeePercent / 100);
// Total Expenses
var totalOperatingExpenses = annualTax + annualInsurance + annualMaintenance + annualOtherExp + annualMgmtFee;
// Net Operating Income (NOI)
var noi = effectiveGrossIncome – totalOperatingExpenses;
// Total Investment Basis
var totalInvestment = propertyPrice + closingCosts;
// Cap Rate
var capRate = (noi / totalInvestment) * 100;
// 4. Update UI
// Helper function for currency
var formatter = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
minimumFractionDigits: 2
});
document.getElementById('displayCapRate').innerHTML = capRate.toFixed(2) + "%";
document.getElementById('displayNOI').innerHTML = formatter.format(noi);
document.getElementById('displayTotalInvestment').innerHTML = formatter.format(totalInvestment);
document.getElementById('displayGrossIncome').innerHTML = formatter.format(effectiveGrossIncome);
document.getElementById('displayTotalExpenses').innerHTML = formatter.format(totalOperatingExpenses);
// Dynamic Comment
var comment = "";
if (capRate = 3 && capRate = 6 && capRate = 9 && capRate < 12) {
comment = "High Cap Rate! Ensures great cash flow but verify the neighborhood and property condition.";
} else {
comment = "Extremely high Cap Rate. Ensure estimates for repairs and vacancies are realistic.";
}
document.getElementById('capRateComment').innerHTML = comment;
// Show Results
document.getElementById('crcResults').style.display = 'block';
// Scroll to results
document.getElementById('crcResults').scrollIntoView({behavior: 'smooth'});
}