Real Estate Cap Rate Calculator
Calculate the Capitalization Rate, NOI, and evaluate the profitability of your real estate investment.
What is Capitalization Rate (Cap Rate)?
The Capitalization Rate, or 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. It is calculated by dividing the property's Net Operating Income (NOI) by its current market value or purchase price.
Essentially, the Cap Rate represents the yield of a property over a one-year time horizon, assuming the property is purchased with cash (without financing). It helps investors compare different properties on an apples-to-apples basis, regardless of how they are financed.
How to Calculate Cap Rate
The formula for Cap Rate is straightforward:
Cap Rate = (Net Operating Income / Current Market Value) × 100%
To use this formula correctly, you must determine the Net Operating Income (NOI). The NOI is calculated by subtracting all operating expenses (taxes, insurance, maintenance, management fees) from the effective gross income. Note that mortgage payments (debt service) are not included in the NOI calculation.
What is a "Good" Cap Rate?
A "good" Cap Rate is subjective and depends heavily on the location, property type, and current economic environment. However, here are some general guidelines:
- 4% to 5%: Common in high-demand, low-risk areas (e.g., city centers like NYC or San Francisco). These properties usually appreciate well but offer lower immediate cash flow.
- 6% to 8%: Generally considered a healthy range for balanced risk and return in many suburban markets.
- 8% to 10%+: Often found in riskier markets or properties requiring significant renovation. These offer high cash flow but may come with tenant instability or lower appreciation.
Why Use Our Cap Rate Calculator?
This tool helps you quickly analyze deals by factoring in not just the rent and price, but also the "hidden" costs like vacancy rates and property management fees. By accurately estimating your expenses, you can avoid purchasing properties that look profitable on the surface but actually have a negative cash flow.