Real Estate Cap Rate Calculator
Includes taxes, insurance, maintenance, management.
Capitalization Rate
0.00%
Net Operating Income (NOI)
$0
Gross Annual Income
$0
What is Capitalization Rate (Cap Rate)?
The Capitalization Rate, or "Cap Rate," is one of the most fundamental metrics used in commercial and residential real estate investment. It represents the expected rate of return on a property based on the income the property is expected to generate.
Unlike a Cash-on-Cash return, which factors in debt leverage, the Cap Rate measures the property's natural ability to generate profit assuming it was bought with all cash. This makes it an excellent tool for comparing the relative value of different properties regardless of financing.
How to Calculate Cap Rate
The formula for Cap Rate is relatively simple, but it requires accurate inputs to be effective. The formula is:
Cap Rate = (Net Operating Income / Current Market Value) x 100
Key Components:
- Net Operating Income (NOI): This is calculated by taking the Gross Annual Income (total rent) and subtracting all operating expenses (taxes, insurance, maintenance, property management fees). Note that NOI does not include mortgage payments.
- Property Value: The current purchase price or market value of the asset.
- Vacancy Rate: It is crucial to account for periods where the unit sits empty. A standard vacancy rate is often estimated between 5% and 8%.
What is a "Good" Cap Rate?
There is no single answer for what constitutes a good cap rate, as it varies heavily by location and asset class. Generally:
- 4% – 5%: Often found in "Class A" properties in high-demand, low-risk areas (e.g., downtown NYC or San Francisco). Lower risk, lower return.
- 6% – 8%: A balanced target for many residential investors in suburban markets.
- 8% – 12%+: Higher returns often associated with higher risk, older buildings, or less desirable neighborhoods.
Use our Cap Rate Calculator above to quickly determine the viability of your next real estate deal before making an offer.