function calculateCapRate() {
// Get input values
var propertyValue = parseFloat(document.getElementById('cr_propertyValue').value);
var grossIncome = parseFloat(document.getElementById('cr_grossIncome').value);
var operatingExpenses = parseFloat(document.getElementById('cr_operatingExpenses').value);
// Validation
if (isNaN(propertyValue) || propertyValue <= 0) {
alert("Please enter a valid Property Market Value greater than zero.");
return;
}
if (isNaN(grossIncome) || grossIncome < 0) {
alert("Please enter a valid Gross Annual Income.");
return;
}
if (isNaN(operatingExpenses) || operatingExpenses 0) {
expenseRatio = (operatingExpenses / grossIncome) * 100;
}
// Display Results
document.getElementById('cr_displayNOI').innerHTML = '$' + noi.toLocaleString('en-US', {minimumFractionDigits: 2, maximumFractionDigits: 2});
document.getElementById('cr_displayCapRate').innerHTML = capRate.toFixed(2) + '%';
document.getElementById('cr_displayExpenseRatio').innerHTML = expenseRatio.toFixed(2) + '%';
// Show result container
document.getElementById('cr_resultContainer').style.display = 'block';
}
Understanding Capitalization Rate (Cap Rate)
The Capitalization Rate, commonly known as the Cap Rate, is one of the most fundamental metrics in commercial and residential real estate investing. It measures the rate of return on a real estate investment property based on the income that the property is expected to generate. This free cap rate calculator helps investors quickly assess the potential profitability of a purchase without factoring in financing (mortgage) costs.
How to Calculate Cap Rate
The formula for calculating Cap Rate is relatively straightforward but requires accurate financial data regarding the property. The formula is:
Cap Rate = (Net Operating Income / Current Market Value) x 100
Key Components:
Net Operating Income (NOI): This is the annual revenue generated by the property minus all necessary operating expenses. NOI excludes principal and interest payments on loans, capital expenditures, depreciation, and amortization.
Gross Annual Income: The total income the property produces if fully rented, plus other income sources (laundry, parking, etc.).
Operating Expenses: Costs required to run the property, including property management fees, insurance, property taxes, utilities, maintenance, and repairs.
Property Value: The current market value or the acquisition price of the asset.
What is a Good Cap Rate?
There is no single "good" Cap Rate that applies to every investment; it is highly subjective and depends on the risk tolerance of the investor and the specific market conditions. However, here are general guidelines:
4% to 6%: Often seen in high-demand, low-risk areas (like major metropolitan cities). These properties usually have lower returns but higher stability and potential for appreciation.
6% to 8%: Generally considered a healthy range for many residential and commercial investments, offering a balance between risk and return.
8% to 12%+: Typical of higher-risk investments or properties in developing areas. While the return is higher, the risk of vacancy or maintenance issues may also be higher.
Cap Rate vs. Cash-on-Cash Return
It is crucial to distinguish between Cap Rate and Cash-on-Cash Return. The Cap Rate assumes you bought the property with 100% cash; it measures the property's intrinsic profitability. Cash-on-Cash Return, however, factors in your financing (mortgage) and measures the return on the actual cash you invested (down payment).
Use our free Cap Rate calculator above to compare properties side-by-side to determine which asset generates the best operational return relative to its price, regardless of how you intend to finance the deal.
Why Use a Cap Rate Calculator?
Real estate investors use Cap Rates for several strategic reasons:
Quick Comparisons: It allows for the comparison of different properties with varying prices and rental incomes on a level playing field.
Valuation Tool: If you know the market Cap Rate for a specific area, you can determine if a property is listed at a fair price based on its NOI.
Trend Analysis: Tracking Cap Rates in a neighborhood over time can indicate if the market is heating up (Cap Rates compressing) or cooling down (Cap Rates expanding).