Cap Rate Calculator
Includes taxes, insurance, maintenance, management fees.
Please fill in all fields with valid positive numbers.
Capitalization Rate
0.00%
Net Operating Income (NOI): $0.00
Effective Gross Income: $0.00
What is Capitalization Rate (Cap Rate)?
The Capitalization Rate, or Cap Rate, is one of the most fundamental metrics used in commercial and residential real estate investing. It measures the expected rate of return on a real estate investment property based on the income the property is expected to generate. Essentially, it helps investors compare the relative value and risk of different properties.
The Cap Rate is calculated by dividing the property's Net Operating Income (NOI) by its current market value or purchase price. It is expressed as a percentage.
How to Calculate Cap Rate
The formula for calculating Cap Rate is straightforward:
Cap Rate = (Net Operating Income / Property Price) × 100%
To use this formula, you must first calculate the Net Operating Income (NOI):
- Gross Annual Income: Total rental income if 100% occupied.
- Effective Gross Income: Gross income minus vacancy losses.
- Operating Expenses: Costs to run the property (taxes, insurance, repairs, property management). Note: Mortgage payments (debt service) are NOT included in NOI.
- NOI: Effective Gross Income minus Operating Expenses.
Real-World Example
Imagine you are looking to purchase a duplex for $500,000.
- The property generates $60,000 in annual rent.
- You estimate a 5% vacancy rate ($3,000 loss).
- Annual operating expenses (taxes, maintenance, etc.) total $15,000.
The Calculation:
- Effective Income = $60,000 – $3,000 = $57,000
- NOI = $57,000 – $15,000 = $42,000
- Cap Rate = ($42,000 / $500,000) = 8.4%
This means for every dollar you invest in this property (cash purchase), you earn an 8.4% return annually before financing costs.
What is a "Good" Cap Rate?
A "good" cap rate is subjective and depends on the risk level and location of the property. generally:
- 4% – 6%: Common in high-demand, low-risk areas (Class A properties in major cities). Lower return, but higher appreciation potential and stability.
- 6% – 8%: Often found in stable suburban areas. A balanced blend of income and stability.
- 8% – 12%+: Common in higher-risk or rural areas. These properties offer higher cash flow to compensate for higher tenant turnover or lower appreciation potential.