Real Estate Cap Rate Calculator
Calculate the potential return on your real estate investment.
(Taxes, insurance, maintenance, management)
Please enter valid positive numbers for Property Price and Rent.
Estimated Cap Rate
0.00%
Net Operating Income (NOI): $0.00 / year
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 of an investment property. It represents the rate of return you can expect to generate on a real estate investment property based on the income the property generates.
Unlike other metrics that might factor in financing (mortgages), Cap Rate is calculated assuming the property is bought with cash. This allows investors to compare the intrinsic value and profitability of different properties regardless of how they are financed.
The Cap Rate Formula
The formula for calculating Cap Rate is relatively simple:
Cap Rate = (Net Operating Income / Current Market Value) × 100
Where:
- Net Operating Income (NOI): This is your total annual revenue (rent + other income) minus all necessary operating expenses (property management, taxes, insurance, repairs). It does not include mortgage payments.
- Current Market Value: This is the purchase price of the property or its current estimated value.
Example Calculation
Imagine you are looking to purchase a duplex for $500,000.
- Gross Income: The property rents for $4,500/month, totaling $54,000/year.
- Vacancy: You estimate a 5% vacancy rate ($2,700 loss).
- Operating Expenses: Taxes, insurance, and maintenance cost $15,000/year.
First, calculate the NOI:
($54,000 – $2,700) – $15,000 = $36,300
Next, divide by the Purchase Price:
$36,300 / $500,000 = 0.0726
Result: The Cap Rate is 7.26%.
What is a "Good" Cap Rate?
There is no single answer for what constitutes a "good" cap rate, as it depends heavily on the location, property type, and current economic environment.
- 4% – 6%: Often seen in high-demand, low-risk areas (like downtown NYC or SF). The return is lower, but the asset is safer and likely to appreciate.
- 6% – 8%: Generally considered a healthy balance between risk and return for residential properties in stable markets.
- 8% – 12%+: Common in older properties, riskier neighborhoods, or rural areas. The return is higher to compensate for higher risk of vacancy or repairs.
Use this calculator to quickly assess deals and filter out properties that don't meet your investment criteria.