Real Estate Cap Rate Calculator
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 investing. It measures the rate of return on a real estate investment property based on the income the property is expected to generate. Essentially, it represents the yield of a property over a one-year time horizon, assuming the property was purchased with cash.
Understanding Cap Rate is crucial for comparing different investment opportunities. Unlike the Cash-on-Cash Return, which accounts for debt service (mortgages), the Cap Rate looks strictly at the property's intrinsic ability to generate revenue relative to its market value or purchase price.
How to Calculate Cap Rate
The formula for calculating Cap Rate is straightforward but requires accurate inputs to be meaningful. The standard formula used in our calculator is:
Cap Rate = Net Operating Income (NOI) / Property Asset Value
To derive the correct numbers:
- Gross Annual Income: Total rental income if the property is fully occupied for the year.
- Vacancy Rate: An estimated percentage of time the property sits empty (standard is often 5-10%).
- Operating Expenses: Costs to run the property, including property taxes, insurance, property management fees, maintenance, and utilities. Note: Mortgage payments are NOT included in operating expenses for Cap Rate calculations.
- Net Operating Income (NOI): (Gross Income – Vacancy Loss) – Operating Expenses.
What is a "Good" Cap Rate?
There is no single "good" Cap Rate that applies to every investor or market. Generally, a higher Cap Rate implies a higher return, but it often correlates with higher risk (e.g., a property in a declining neighborhood or requiring major repairs). Conversely, a lower Cap Rate often indicates a safer, more stable asset in a high-demand area.
- 4% – 6%: Often seen in Class A properties in major metropolitan areas (low risk, high appreciation potential).
- 6% – 8%: Common for stable residential rentals and established commercial properties.
- 8% – 12%+: Typical for riskier assets, rural areas, or properties requiring value-add renovations.
Use this calculator to quickly assess whether a property meets your specific investment criteria before digging deeper into the financials.