Cap Rate Calculator
Determine the Capitalization Rate of a commercial or residential investment property quickly and accurately.
What is Cap Rate and Why Does It Matter?
The Capitalization Rate, or "Cap Rate," is one of the most vital metrics in real estate investing. It measures the yield of a property over a one-year time horizon assuming the property was purchased with cash and not financed. It allows investors to compare different real estate opportunities side-by-side regardless of their size.
The Cap Rate Formula
To calculate the cap rate, you need two primary figures: the Net Operating Income (NOI) and the Current Market Value (or purchase price). The formula is expressed as:
How to Calculate Net Operating Income (NOI)
Net Operating Income is the total income generated by the property minus all necessary operating expenses. Important: Operating expenses do not include mortgage payments (debt service), depreciation, or capital expenditures (like a new roof).
- Operating Expenses include: Property taxes, insurance, maintenance, property management fees, and utilities not paid by tenants.
Let's say you are looking at an apartment complex valued at $1,200,000.
The annual rent collected is $120,000.
The annual taxes, insurance, and repairs cost $30,000.
1. Calculate NOI: $120,000 – $30,000 = $90,000.
2. Divide NOI by Value: $90,000 / $1,200,000 = 0.075.
3. Multiply by 100: 7.5% Cap Rate.
What is a "Good" Cap Rate?
A "good" cap rate is subjective and depends heavily on the asset class and location. Generally, a higher cap rate (8-10%) implies higher potential return but also higher risk (often in less stable neighborhoods). A lower cap rate (4-6%) usually indicates a safer investment in a "trophy" location where property values are expected to remain stable or appreciate significantly.