Calculate Your Property's Cap Rate
(Tax, Insurance, Maint, Mgmt)
Gross Potential Income:
Vacancy Loss:
Effective Gross Income:
Operating Expenses:
Net Operating Income (NOI):
Cap Rate:
What is Capitalization Rate (Cap Rate)?
The Capitalization Rate, often shortened to Cap Rate, is one of the most fundamental metrics used in real estate investing to evaluate the profitability and return potential of an investment property. Unlike a mortgage calculator that focuses on monthly payments, the Cap Rate measures the property's natural rate of return for a single year without taking financing into account.
In simple terms, it represents the percentage of your investment you would earn back in annual net profit if you bought the property entirely with cash. It helps investors compare similar properties in the same market regardless of how they are financed.
The Cap Rate Formula
The formula to calculate Cap Rate is straightforward but requires accurate financial data regarding the property's operations. The formula is:
Cap Rate = (Net Operating Income / Current Market Value) × 100
To use this formula accurately, you must first calculate the Net Operating Income (NOI):
- Gross Income: Total rental income plus other income sources (laundry, parking, storage).
- Vacancy Loss: Income lost due to units sitting empty.
- Operating Expenses: Costs to run the property (taxes, insurance, maintenance, property management, utilities). Note: Mortgage payments are NOT operating expenses.
Example Calculation
Let's look at a realistic example of how a Cap Rate is determined for a small multi-family property:
| Item | Amount |
|---|---|
| Purchase Price | $500,000 |
| Annual Rental Income | $50,000 |
| Operating Expenses | $15,000 |
| Net Operating Income (NOI) | $35,000 |
Calculation: ($35,000 ÷ $500,000) = 0.07 or 7.0%.
What is a "Good" Cap Rate?
There is no single "good" Cap Rate that applies to every investment; it is highly dependent on the location, property class, and current economic environment. Generally speaking:
- 4% – 6%: Often found in high-demand, low-risk areas (Tier 1 cities). Properties here appreciate faster but offer lower immediate cash flow.
- 6% – 8%: considered a healthy balance of risk and return for many residential investors in stable suburban markets.
- 8% – 12%: Usually found in riskier markets, older properties requiring renovation, or rural areas. These offer high cash flow but lower appreciation potential and higher risk of vacancy.
Use the calculator above to quickly analyze deals and ensure the property meets your specific investment criteria before making an offer.