Property Cap Rate Calculator
Determine the potential return on your real estate investment
What is a Property Cap Rate?
The Capitalization Rate (or Cap Rate) is one of the most fundamental metrics in real estate investment. It represents the yield of a property over a one-year time horizon assuming the property is purchased with cash. By comparing the Net Operating Income to the asset value, investors can quickly assess the profitability and risk profile of different commercial or residential rental properties.
How the Cap Rate is Calculated
The calculation follows a straightforward formula that focuses on the income-generating potential of the asset itself, independent of financing or mortgage considerations:
Cap Rate = (Net Operating Income / Current Market Value) × 100
Where Net Operating Income (NOI) is your Annual Gross Income minus all Operating Expenses (maintenance, taxes, insurance, and property management fees). Note that NOI does not include mortgage payments or capital expenditures.
Real-World Example
Imagine you are looking at a multi-family unit with the following financials:
- Purchase Price: $800,000
- Gross Annual Rent: $96,000
- Annual Operating Expenses: $24,000
First, calculate the NOI: $96,000 – $24,000 = $72,000. Next, divide the NOI by the purchase price: $72,000 / $800,000 = 0.09. Multiply by 100 to get a 9.0% Cap Rate.
Why the Cap Rate Matters
Cap rates allow investors to compare "apples to apples" when looking at different buildings in different locations. Generally, a higher cap rate implies a higher potential return but often carries higher risk (such as a property in a declining neighborhood or an older building requiring more maintenance). Conversely, lower cap rates are typical for "trophy" assets in prime locations like New York City or London, where the investment is considered very safe.