Property Details
Annual Expenses
Analysis Results
Gross Annual Income
$0.00
Effective Gross Income (After Vacancy)
$0.00
Total Annual Expenses
$0.00
Net Operating Income (NOI)
$0.00
Capitalization Rate (Cap Rate)
0.00%
What is a Cap Rate Calculator?
A Capitalization Rate (Cap Rate) Calculator is an essential tool for real estate investors to evaluate the profitability of an investment property. The Cap Rate represents the rate of return on a real estate investment property based on the income that the property is expected to generate. It is calculated by dividing the property's Net Operating Income (NOI) by its current market value or purchase price.
Unlike other metrics like Cash-on-Cash Return, the Cap Rate does not take into account mortgage financing. This makes it an excellent metric for comparing different properties directly, regardless of how they are financed.
How to Calculate Cap Rate
The formula used in this calculator is:
Cap Rate = (Net Operating Income / Property Value) × 100
Where Net Operating Income (NOI) is calculated as:
- Gross Rental Income: The total rent collected annually.
- Less Vacancy Losses: Income lost due to empty units.
- Less Operating Expenses: Costs such as property management, taxes, insurance, and maintenance.
What is a Good Cap Rate?
Determining a "good" Cap Rate depends heavily on the location and the risk level of the asset. Generally speaking:
- 4% to 6%: Common in high-demand, low-risk areas (like downtown NYC or San Francisco). These properties usually have high appreciation potential but lower immediate cash flow.
- 6% to 8%: A balanced target for many residential investors in suburban markets.
- 8% to 12%: Often found in riskier neighborhoods or rural areas. These properties offer higher cash flow to compensate for higher tenant turnover or lower appreciation potential.
Example Calculation
Imagine you are buying a duplex for $500,000.
- Monthly Rent: $4,500 ($54,000 annually)
- Vacancy (5%): $2,700
- Effective Income: $51,300
- Annual Expenses (Taxes, Insurance, Management, Maintenance): $15,000
- NOI: $51,300 – $15,000 = $36,300
Your Cap Rate would be: ($36,300 / $500,000) = 7.26%. This indicates a solid return for a residential property.