Apartment Cap Rate Calculator
Gross Operating Income:
Net Operating Income (NOI):
How to Calculate Cap Rate for Apartments
The Capitalization Rate, or "Cap Rate," is one of the most critical metrics used in commercial real estate to evaluate the profitability and return potential of an apartment building. It represents the yield of a property over a one-year time horizon assuming the asset is purchased with cash.
The Apartment Cap Rate Formula
Calculating the cap rate is a straightforward mathematical process, but it requires accurate financial data. The formula is:
Cap Rate = (Net Operating Income / Current Market Value) × 100
To find the Net Operating Income (NOI), you must follow these steps:
- Step 1: Determine Gross Potential Income: Sum all rent collected over 12 months.
- Step 2: Add Other Income: Include revenue from laundry facilities, pet fees, parking, and storage units.
- Step 3: Subtract Operating Expenses: Deduct property taxes, insurance, maintenance, property management fees, and utilities. Note: Do not include mortgage payments (debt service) or capital expenditures.
Example Calculation
Imagine an apartment complex with the following annual financials:
- Gross Rental Income: $200,000
- Other Income: $5,000
- Operating Expenses: $80,000
- Current Market Value: $2,000,000
Calculation:
NOI = ($200,000 + $5,000) – $80,000 = $125,000
Cap Rate = ($125,000 / $2,000,000) = 0.0625 or 6.25%
What is a Good Cap Rate for Apartments?
A "good" cap rate depends on the location (market class) and the risk profile of the property. Generally:
- Class A Properties (Luxury): Usually see lower cap rates (3% – 5%) because they are lower risk and located in prime areas.
- Class B Properties: Moderate risk, often seeing cap rates between 5% – 7%.
- Class C Properties (Value-Add): Higher risk or older buildings often command higher cap rates (7% – 10%+) to compensate for the increased maintenance and vacancy risk.