Real Estate Cap Rate Calculator
Estimated Capitalization Rate
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$0
Net Operating Income (NOI)
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Total Annual Expenses
What is Capitalization Rate (Cap Rate)?
The Capitalization Rate, commonly known as the Cap Rate, is one of the most fundamental metrics used 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. Unlike other metrics like ROI (Return on Investment) or Cash-on-Cash return, the Cap Rate focuses strictly on the property's natural ability to generate income relative to its purchase price, ignoring debt financing.
The Cap Rate is calculated by dividing the property's Net Operating Income (NOI) by the Property Asset Value (or purchase price).
How to Calculate Cap Rate
Our calculator uses the standard industry formula to ensure accuracy for your investment analysis:
- Step 1: Determine Gross Income. This is the total rental income the property would generate if fully occupied for the year (Monthly Rent × 12).
- Step 2: Adjust for Vacancy. No property is occupied 100% of the time. We deduct a vacancy allowance (typically 5-10%) to find the Effective Gross Income.
- Step 3: Deduct Operating Expenses. Subtract all costs required to run the property, including taxes, insurance, maintenance, property management fees, and HOA dues. Note: Mortgage payments are not included in operating expenses for Cap Rate calculations.
- Step 4: Calculate NOI. Effective Gross Income minus Operating Expenses gives you the Net Operating Income.
- Step 5: Divide by Price. Finally, divide the NOI by the property's purchase price to get the Cap Rate percentage.
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 class, and the current economic environment. However, general guidelines include:
- 4% to 5%: Common in high-demand, low-risk areas (like downtown San Francisco or New York City). These properties offer stability but lower immediate returns.
- 6% to 8%: Often considered a healthy balance for residential rental properties in stable suburban markets.
- 8% to 10%+: Typically found in riskier markets or properties requiring significant renovation. While the return is higher, the risk of vacancy or repair costs is also elevated.
Why Use This Cap Rate Calculator?
Calculating the Cap Rate manually can lead to errors, particularly when aggregating annual expenses against monthly income streams. This tool automates the process, allowing investors to quickly screen multiple properties. By inputting accurate estimates for vacancy, management fees, and maintenance, you get a realistic view of the property's performance before making an offer.