How to Calculate Cap Rate on Real Estate

(Include taxes, insurance, maintenance, and management. Exclude mortgage payments.)

Net Operating Income (NOI):
$0

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Capitalization Rate (Cap Rate):
0%

Understanding Cap Rate in Real Estate

The Capitalization Rate, commonly known as the Cap Rate, is a fundamental metric used by real estate investors to evaluate the profitability and potential return on an investment property. It represents the yield of a property over a one-year time horizon assuming the property was purchased with cash.

The Cap Rate Formula

Cap Rate = (Net Operating Income / Current Market Value) × 100

Step-by-Step Calculation Guide

1. Determine Gross Income: Sum up all rental income collected from the property over 12 months.
2. Calculate Operating Expenses: Include property taxes, homeowners insurance, property management fees, repairs, maintenance, and utilities not paid by tenants. Important: Do not include mortgage interest or principal payments.
3. Find the Net Operating Income (NOI): Subtract the total operating expenses from the gross annual income.
4. Divide by Value: Divide the NOI by the current market price or purchase price of the property.
5. Convert to Percentage: Multiply by 100 to get the final Cap Rate percentage.

Practical Example

Imagine you are looking at a commercial building priced at $1,200,000.

• Gross Annual Rent: $150,000
• Annual Expenses: $45,000 (Taxes, Insurance, etc.)
• NOI: $150,000 – $45,000 = $105,000
• Cap Rate: ($105,000 / $1,200,000) × 100 = 8.75%

What is a "Good" Cap Rate?

A "good" cap rate depends on the location (market) and the property type. Generally, a higher cap rate indicates a higher potential return but often carries higher risk. Lower cap rates (4% – 5%) are common in "gateway cities" or prime locations with high demand and stability. Higher cap rates (8% – 10%+) are often found in emerging markets or properties requiring more intensive management.

function calculateCapRate() { var val = parseFloat(document.getElementById('propertyValue').value); var inc = parseFloat(document.getElementById('grossIncome').value); var exp = parseFloat(document.getElementById('operatingExpenses').value); var resultsDiv = document.getElementById('resultsArea'); var displayNOI = document.getElementById('displayNOI'); var displayCapRate = document.getElementById('displayCapRate'); // Validation if (isNaN(val) || isNaN(inc) || isNaN(exp) || val <= 0) { alert("Please enter valid positive numbers for all fields. Property value must be greater than zero."); return; } // Calculations var noi = inc – exp; var capRate = (noi / val) * 100; // Formatting displayNOI.innerHTML = "$" + noi.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); displayCapRate.innerHTML = capRate.toFixed(2) + "%"; // Show Results resultsDiv.style.display = "block"; // Scroll to results on mobile if (window.innerWidth < 600) { resultsDiv.scrollIntoView({ behavior: 'smooth' }); } }