$
$
Total rent collected per year before expenses.
$
Excludes mortgage payments (taxes, insurance, maintenance only).
Please enter valid positive numbers.
Estimated Capitalization Rate
0.00%
Gross Income:
$0
Operating Expenses:
$0
Net Operating Income (NOI):
$0
Formula for Calculating Cap Rate
The Capitalization Rate, commonly referred to as the Cap Rate, is one of the most fundamental metrics used in commercial real estate analysis. It helps investors measure the potential return on an investment property independent of financing method. essentially answering the question: "If I bought this property with all cash, what percentage of my investment would I get back in profit each year?"
Cap Rate = (Net Operating Income / Current Market Value) × 100
Understanding the Components
To accurately use the formula for calculating cap rate, you must understand its two primary inputs:
1. Net Operating Income (NOI)
This is the annual income generated by the property after deducting all operating expenses but before deducting income taxes and financing costs (mortgage payments). The calculation is:
- Gross Rental Income: The total revenue from rents and other sources (parking, laundry).
- Minus Operating Expenses: Property taxes, insurance, management fees, maintenance, utilities, and vacancy reserves.
- Note: Do NOT subtract mortgage principal or interest payments. Cap Rate is a measure of the asset's performance, not your specific loan terms.
2. Current Market Value
This is either the purchase price of the property (if you are buying) or the current appraised market value (if you already own it and are assessing performance).
Example Calculation
Imagine you are looking at a four-plex apartment building listed for $500,000.
- The property generates $60,000 in annual rent.
- The annual operating expenses (taxes, insurance, repairs) total $20,000.
First, calculate the NOI: $60,000 – $20,000 = $40,000.
Next, apply the cap rate formula: ($40,000 / $500,000) = 0.08.
Multiply by 100 to get the percentage: 8.00% Cap Rate.
What is a "Good" Cap Rate?
There is no single "good" cap rate, as it varies by risk and location. Generally:
- 4% to 6%: Common in high-demand "Tier 1" cities (lower risk, lower return).
- 6% to 8%: Often found in stable suburban markets.
- 8% to 10%+: Typical in riskier markets or properties requiring renovation (higher risk, higher potential return).