Cap Rate Calculator
(Taxes, Insurance, Maintenance, Management)
Please enter valid positive numbers.
Gross Annual Income:
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Effective Gross Income (Adjusted for Vacancy):
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Net Operating Income (NOI):
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Capitalization Rate (Cap Rate):
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What is the Cap Rate Formula?
The Capitalization Rate (Cap Rate) is one of the most fundamental metrics used in real estate investing to evaluate the profitability of an investment property. It represents the rate of return on a real estate investment property based on the income that the property is expected to generate.
The formula for calculating Cap Rate is straightforward:
Cap Rate = (Net Operating Income / Current Market Value) × 100%
Understanding the Inputs
- Net Operating Income (NOI): This is your annual revenue minus all necessary operating expenses. It includes rental income but excludes mortgage payments, depreciation, and income taxes.
- Property Value: The current market value of the property or the purchase price if you are evaluating a potential buy.
- Operating Expenses: These are the costs required to run and maintain the property, such as property taxes, insurance, management fees, repairs, and utilities.
Why is Cap Rate Important?
Cap Rate allows investors to compare different properties on an apples-to-apples basis, regardless of how they are financed. Since it focuses on the property's intrinsic ability to generate income (NOI), it removes the variable of debt financing from the equation.
For example, a property with a 7% Cap Rate typically implies that for every $100,000 invested, you can expect $7,000 in net annual income, assuming an all-cash purchase.
What is a Good Cap Rate?
There is no single "good" Cap Rate, as it varies by location, property class, and current interest rates. However, here are some general guidelines:
- 4% to 5%: Often found in high-demand, low-risk areas (Class A properties in major cities). These properties appreciate well but offer lower immediate cash flow.
- 6% to 8%: Considered a healthy balance between risk and return for many residential and commercial investments.
- 8% to 10%+: Typically indicates higher risk or older properties (Class C or D) in less desirable areas, but with higher potential cash flow.
Cap Rate vs. Cash on Cash Return
While Cap Rate measures the return on the total value of the property, Cash on Cash Return measures the return on the actual cash invested (down payment). If you are using leverage (a mortgage), your Cash on Cash return might differ significantly from the Cap Rate.