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Commercial Real Estate Cap Rate Calculator

Analysis Results

Net Operating Income (NOI):

Capitalization Rate:

Gross Multiplier:

function calculateCapRate() { var propertyValue = parseFloat(document.getElementById('propertyValue').value); var grossIncome = parseFloat(document.getElementById('grossIncome').value); var vacancyRate = parseFloat(document.getElementById('vacancyRate').value) || 0; var operatingExpenses = parseFloat(document.getElementById('operatingExpenses').value) || 0; if (isNaN(propertyValue) || isNaN(grossIncome) || propertyValue <= 0) { alert('Please enter valid numbers for Property Value and Gross Income.'); return; } var vacancyLoss = grossIncome * (vacancyRate / 100); var effectiveGrossIncome = grossIncome – vacancyLoss; var netOperatingIncome = effectiveGrossIncome – operatingExpenses; var capRate = (netOperatingIncome / propertyValue) * 100; var grm = propertyValue / grossIncome; document.getElementById('resNOI').innerText = '$' + netOperatingIncome.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); document.getElementById('resCapRate').innerText = capRate.toFixed(2) + '%'; document.getElementById('resGRM').innerText = grm.toFixed(2); document.getElementById('resultsArea').style.display = 'block'; }

Understanding Capitalization Rate (Cap Rate) in Real Estate

The Capitalization Rate, or "Cap Rate," is one of the most critical metrics used by commercial real estate investors to evaluate the profitability and return potential of an income-producing property. In simple terms, it represents the yield of a property over a one-year time horizon assuming the property was purchased with cash.

How the Cap Rate Calculation Works

The fundamental formula for calculating the Cap Rate is:

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

Key Components of the Calculation

• Gross Annual Rental Income: The total potential income if every unit is occupied at market rent.
• Vacancy Rate: An allowance for units that might be empty or tenants who fail to pay. A standard benchmark is often 5% to 10%.
• Operating Expenses: These include property taxes, insurance, maintenance, utilities, and property management fees. Note: Debt service (mortgage payments) is NOT included in operating expenses.
• Net Operating Income (NOI): This is the cash left over after all operating expenses are paid but before mortgage payments.

Example: Analyzing a Multi-Family Building

Imagine you are looking at an apartment building priced at $2,000,000. Here is how you would determine the Cap Rate:

1. Gross Income: $240,000 per year.
2. Vacancy (5%): $12,000.
3. Operating Expenses: $80,000 (Taxes, Insurance, Repairs).
4. NOI Calculation: $240,000 – $12,000 – $80,000 = $148,000.
5. Cap Rate: ($148,000 / $2,000,000) = 7.4%.

What is a "Good" Cap Rate?

A "good" cap rate is subjective and depends heavily on the market and property type. Generally:

• Low Cap Rates (4% – 5%): Usually found in "Class A" properties in major metro areas like New York or San Francisco. These are considered lower risk but offer lower immediate yields.
• High Cap Rates (8% – 12%): Often found in "Class C" properties or smaller markets. These suggest higher risk (higher vacancy, older buildings) but offer higher potential returns on investment.

Pro Tip: When comparing properties, always ensure the Operating Expenses are calculated accurately. Some sellers may omit "hidden" costs like capital reserves or management fees to artificially inflate the Cap Rate.