Cap Rate Calculator
Determine the Capitalization Rate for your real estate investment.
Calculation Summary
Net Operating Income (NOI):
Capitalization Rate:
How to Calculate Cap Rate
The Capitalization Rate (Cap Rate) is one of the most fundamental metrics used in real estate investing to evaluate the profitability and return potential of an income-generating property. It represents the yield of a property over a one-year time horizon assuming the property is purchased with cash.
Understanding the Components
- Net Operating Income (NOI): This is the total income generated by the property (rent, parking fees, laundry) minus all necessary operating expenses (property taxes, insurance, maintenance, property management). It does not include mortgage payments or capital expenditures.
- Current Market Value: This is either the purchase price of the property or the current appraised market value.
- Operating Expenses: These are the day-to-day costs of running the property. Investors often include a "vacancy factor" to account for times when units are not rented.
Real-World Example
Imagine you are looking at a multi-family duplex with the following financial profile:
- Purchase Price: $400,000
- Annual Gross Rent: $48,000
- Operating Expenses: $12,000
First, calculate the NOI: $48,000 – $12,000 = $36,000.
Next, divide the NOI by the purchase price: $36,000 / $400,000 = 0.09.
Finally, multiply by 100 to get the percentage: 9% Cap Rate.
What is a "Good" Cap Rate?
There is no universal "good" cap rate. It depends on the location (market), property type, and the current economic environment. Generally, a higher cap rate (8-10%) implies higher risk but higher potential return, often found in developing areas. A lower cap rate (4-6%) usually indicates lower risk and higher demand, typical for "Class A" properties in major metropolitan hubs like New York or San Francisco.