Whether you are a seasoned investor or buying your first rental property, understanding the Capitalization Rate (Cap Rate) is fundamental to evaluating the potential profitability of a real estate investment. Our Cap Rate Calculator helps you quickly determine the return on investment (ROI) based on the property's income and purchase price.
What is Cap Rate?
The Capitalization Rate is a metric used in the real estate world to indicate the rate of return that is expected to be generated on a real estate investment property. It is calculated by dividing the property's Net Operating Income (NOI) by its current market value or purchase price.
Formula: Cap Rate = (Net Operating Income / Property Value) × 100%
How to Calculate Cap Rate (Step-by-Step)
To accurately calculate the Cap Rate, you must perform several underlying calculations, which our tool handles automatically:
1. Determine Gross Annual Income
This is the total rental income the property would generate if it were 100% occupied for the entire year. Formula: Monthly Rent × 12.
2. Account for Vacancy Losses
No property is occupied 100% of the time. You must subtract a vacancy allowance (typically 5-10%) to find the Effective Gross Income.
3. Calculate Operating Expenses
Sum up all costs required to operate the property. Note that mortgage payments are NOT included in Cap Rate calculations. Common operating expenses include:
Property Taxes
Landlord Insurance
Maintenance and Repairs (reserve funds)
Property Management Fees
HOA Fees and Utilities (if landlord paid)
4. Calculate Net Operating Income (NOI)
Subtract the Total Operating Expenses from the Effective Gross Income.
5. Divide by Purchase Price
Finally, divide the NOI by the purchase price (or current market value) to get the percentage.
What is a "Good" Cap Rate?
There is no single answer, as a "good" Cap Rate depends on the risk level and location of the property:
4% to 5%: Common in high-demand areas (like NYC or San Francisco) where appreciation is high and risk is low.
6% to 8%: Generally considered a healthy balance for stable suburban markets.
10%+: Often found in riskier neighborhoods or rural areas, implying higher cash flow but potentially higher maintenance or vacancy risks.
Why Exclude Mortgage Payments?
Cap Rate measures the performance of the property itself, independent of how it is financed. This allows investors to compare properties apples-to-apples, whether they are paying all cash or taking out a loan. To factor in your mortgage, you would use a Cash-on-Cash Return calculator instead.
function calculateCapRate() {
// 1. Get Input Values
var purchasePrice = parseFloat(document.getElementById('purchasePrice').value);
var monthlyRent = parseFloat(document.getElementById('monthlyRent').value);
var vacancyRate = parseFloat(document.getElementById('vacancyRate').value);
// Expenses
var propertyTax = parseFloat(document.getElementById('propertyTax').value);
var insurance = parseFloat(document.getElementById('insurance').value);
var maintenance = parseFloat(document.getElementById('maintenance').value);
var managementFeePercent = parseFloat(document.getElementById('managementFee').value);
var otherExp = parseFloat(document.getElementById('otherExp').value);
// 2. Validate Inputs (Handle empty or NaN)
if (isNaN(purchasePrice)) purchasePrice = 0;
if (isNaN(monthlyRent)) monthlyRent = 0;
if (isNaN(vacancyRate)) vacancyRate = 0;
if (isNaN(propertyTax)) propertyTax = 0;
if (isNaN(insurance)) insurance = 0;
if (isNaN(maintenance)) maintenance = 0;
if (isNaN(managementFeePercent)) managementFeePercent = 0;
if (isNaN(otherExp)) otherExp = 0;
// Validation: Prevent division by zero later
if (purchasePrice <= 0) {
alert("Please enter a valid Property Purchase Price greater than 0.");
return;
}
// 3. Perform Calculations
// Gross Annual Income
var grossAnnualIncome = monthlyRent * 12;
// Vacancy Loss
var vacancyLoss = grossAnnualIncome * (vacancyRate / 100);
// Effective Gross Income
var effectiveGrossIncome = grossAnnualIncome – vacancyLoss;
// Management Fee (calculated on Effective Gross Income usually, or Gross. Using Effective is standard practice for conservative estimates, but often Gross. Let's use Effective Gross for accuracy)
// Standard practice varies, but typically applied to collected rent (Effective).
var managementFeeAmount = effectiveGrossIncome * (managementFeePercent / 100);
// Total Expenses
var totalExpenses = propertyTax + insurance + maintenance + managementFeeAmount + otherExp;
// Net Operating Income (NOI)
var noi = effectiveGrossIncome – totalExpenses;
// Cap Rate
var capRate = (noi / purchasePrice) * 100;
// 4. Update UI
// Format numbers to currency
var formatter = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
minimumFractionDigits: 0,
maximumFractionDigits: 0,
});
document.getElementById('grossIncomeResult').innerText = formatter.format(grossAnnualIncome);
document.getElementById('effectiveIncomeResult').innerText = formatter.format(effectiveGrossIncome);
document.getElementById('totalExpensesResult').innerText = formatter.format(totalExpenses);
document.getElementById('noiResult').innerText = formatter.format(noi);
document.getElementById('capRateResult').innerText = capRate.toFixed(2) + "%";
// Show results area
document.getElementById('resultsArea').style.display = 'block';
}