How is a Cap Rate Calculated

Use this calculator to quickly determine the Capitalization Rate (Cap Rate) of a potential real estate investment based on the property's market value, gross income, and operating expenses.

Please enter valid numeric values for all fields. Property Value must be greater than zero.

Understanding the Cap Rate Formula

The Capitalization Rate, or Cap Rate, is one of the most fundamental metrics in commercial and residential real estate investing. It measures the rate of return you can expect to generate on a real estate investment property based on the income the property generates.

Unlike a mortgage calculator or cash-on-cash return calculator, the Cap Rate assumes you are buying the property with 100% cash. This allows investors to compare the intrinsic profitability of different properties regardless of how they are financed.

Cap Rate = (Net Operating Income / Current Market Value) × 100

Step 1: Calculate Net Operating Income (NOI)

To calculate the Cap Rate, you first need to determine the Net Operating Income. The formula for NOI is:

NOI = Annual Gross Income – Annual Operating Expenses

Included in Operating Expenses:

• Property Management Fees
• Property Taxes
• Insurance
• Maintenance and Repairs
• Utilities (if landlord paid)
• Vacancy Reserves

NOT Included in Operating Expenses: Mortgage payments (principal and interest), capital expenditures (major renovations), and depreciation.

Step 2: Divide by Property Value

Once you have the NOI, divide it by the property's current market value or the purchase price. Finally, multiply by 100 to get a percentage.

Example Calculation

Let's look at a concrete example to answer "how is a cap rate calculated" in a real-world scenario:

• Purchase Price: $500,000
• Gross Annual Rent: $60,000
• Annual Expenses: $20,000 (Taxes, Insurance, Maintenance)

First, we calculate the NOI:

$60,000 (Income) – $20,000 (Expenses) = $40,000 NOI

Next, we divide NOI by the Price:

$40,000 / $500,000 = 0.08

Finally, convert to a percentage:

0.08 × 100 = 8.0% Cap Rate

What is a "Good" Cap Rate?

There is no single answer to what constitutes a "good" cap rate, as it varies heavily by location, property type, and the current economic environment. However, general guidelines suggest:

• 4% to 5%: Often seen in high-demand, low-risk areas (like downtown NYC or San Francisco). Lower risk usually yields lower returns.
• 6% to 8%: Considered a healthy balance of risk and return for many suburban residential markets.
• 10%+: Often indicates higher risk (older properties, declining neighborhoods) or exceptional management efficiency.

Why Cap Rate Matters

Investors use the Cap Rate for three main reasons:

1. Comparison: It allows for an "apples-to-apples" comparison between different properties, regardless of price or financing terms.
2. Trend Analysis: Tracking cap rates in a specific neighborhood helps investors understand if the market is heating up (cap rates compressing) or cooling down (cap rates expanding).
3. Payback Period: Roughly speaking, if a property has a 10% cap rate, it will take 10 years to recover your initial investment through cash flow alone (assuming no changes in income).

function calculateRealEstateCapRate() { // 1. Get references to input elements var propertyValueInput = document.getElementById('propertyValue'); var grossIncomeInput = document.getElementById('grossIncome'); var operatingExpensesInput = document.getElementById('operatingExpenses'); var errorDisplay = document.getElementById('error-display'); var resultsDisplay = document.getElementById('results-display'); // 2. Parse values var propertyValue = parseFloat(propertyValueInput.value); var grossIncome = parseFloat(grossIncomeInput.value); var operatingExpenses = parseFloat(operatingExpensesInput.value); // 3. Validation Logic // Ensure all inputs are numbers and Property Value is > 0 (to avoid divide by zero) if (isNaN(propertyValue) || isNaN(grossIncome) || isNaN(operatingExpenses) || propertyValue <= 0) { errorDisplay.style.display = 'block'; resultsDisplay.style.display = 'none'; return; } // Hide error if validation passes errorDisplay.style.display = 'none'; // 4. Perform Calculations // NOI = Income – Expenses var netOperatingIncome = grossIncome – operatingExpenses; // Cap Rate = (NOI / Value) * 100 var capRate = (netOperatingIncome / propertyValue) * 100; // 5. Format Currency and Percentage var formatter = new Intl.NumberFormat('en-US', { style: 'currency', currency: 'USD', minimumFractionDigits: 0, maximumFractionDigits: 0, }); // 6. Update DOM document.getElementById('displayGross').innerText = formatter.format(grossIncome); document.getElementById('displayExpenses').innerText = formatter.format(operatingExpenses); document.getElementById('displayNOI').innerText = formatter.format(netOperatingIncome); // Handle formatting for Cap Rate (2 decimal places) document.getElementById('displayCapRate').innerText = capRate.toFixed(2) + "%"; // Show results resultsDisplay.style.display = 'block'; }