How to Calculate Cap Rate for a Rental Property

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Cap Rate Calculator

Determine the profitability of your rental property investment

Include taxes, insurance, maintenance, and management. Do NOT include mortgage payments.

How to Calculate Cap Rate for a Rental Property

The capitalization rate (or "cap rate") is one of the most critical metrics used by real estate investors to evaluate the profitability and return potential of an income-producing property. Unlike other metrics, the cap rate allows you to compare different properties regardless of how they are financed.

The Cap Rate Formula

The calculation is straightforward but requires accurate data regarding income and expenses. The formula is:

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

Step-by-Step Calculation

  1. Determine Gross Annual Income: Multiply your monthly rent by 12.
  2. Calculate Net Operating Income (NOI): Subtract all annual operating expenses (property taxes, insurance, repairs, vacancy losses) from the Gross Annual Income. Note: Do not include mortgage interest or principal payments in this calculation.
  3. Divide by Property Value: Divide the NOI by the current purchase price or market value of the property.
  4. Convert to Percentage: Multiply the result by 100 to get your Cap Rate.

Example Calculation

Imagine you are looking at a rental property with the following figures:

  • Purchase Price: $500,000
  • Monthly Rent: $4,000 ($48,000/year)
  • Annual Expenses: $12,000 (Taxes, Insurance, Utilities)

First, calculate the NOI: $48,000 – $12,000 = $36,000.

Next, calculate the Cap Rate: ($36,000 / $500,000) = 0.072. Multiply by 100 to get 7.2%.

What is a "Good" Cap Rate?

A "good" cap rate depends on the location and the property type. Generally, a higher cap rate (8% to 10%+) indicates higher potential returns but often comes with higher risk (e.g., older buildings or less desirable neighborhoods). A lower cap rate (4% to 6%) usually indicates a safer investment in a high-demand "A-class" location where property values are expected to appreciate significantly.

function calculateRentalCapRate() { var propertyValue = parseFloat(document.getElementById('propertyValue').value); var monthlyRent = parseFloat(document.getElementById('monthlyRent').value); var annualExpenses = parseFloat(document.getElementById('annualExpenses').value); var resultDiv = document.getElementById('capRateResult'); var display = document.getElementById('resultDisplay'); if (isNaN(propertyValue) || isNaN(monthlyRent) || isNaN(annualExpenses) || propertyValue <= 0) { resultDiv.style.display = "block"; resultDiv.style.borderColor = "#e74c3c"; display.innerHTML = "Please enter valid positive numbers for all fields."; return; } var annualGrossIncome = monthlyRent * 12; var netOperatingIncome = annualGrossIncome – annualExpenses; var capRate = (netOperatingIncome / propertyValue) * 100; resultDiv.style.display = "block"; resultDiv.style.borderColor = "#27ae60"; var htmlResult = "
Property Analysis Results
"; htmlResult += "
" + capRate.toFixed(2) + "% Cap Rate
"; htmlResult += "
"; htmlResult += "
Annual NOI
$" + netOperatingIncome.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}) + "
"; htmlResult += "
Gross Income
$" + annualGrossIncome.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}) + "
"; htmlResult += "
"; if (capRate < 0) { htmlResult += "Warning: Your operating expenses exceed your rental income. This property has a negative return."; } display.innerHTML = htmlResult; }

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