How to Calculate Cap Rate Income Property

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Income Property Cap Rate Calculator

Include taxes, insurance, maintenance, and management. Exclude mortgage payments.

Calculation Summary:

Annual Net Operating Income (NOI):

Capitalization Rate:

function calculateCapRate() { var price = parseFloat(document.getElementById("propertyValue").value); var rent = parseFloat(document.getElementById("monthlyRent").value); var expenses = parseFloat(document.getElementById("monthlyExpenses").value); var resultDiv = document.getElementById("capRateResult"); if (isNaN(price) || isNaN(rent) || isNaN(expenses) || price = 8) { message = "This property shows a strong yield compared to market averages."; } else if (capRate >= 4) { message = "This is a typical cap rate for stable residential or commercial assets in many markets."; } else { message = "This is a lower cap rate, often seen in high-demand 'Class A' markets or properties with high appreciation potential."; } document.getElementById("analysisMessage").innerText = message; resultDiv.style.display = "block"; }

How to Calculate Cap Rate for Income Property

The Capitalization Rate, or "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. Unlike ROI, which considers financing and mortgage costs, the Cap Rate looks at the property's natural performance as if it were purchased in cash.

The Cap Rate Formula

Calculating the cap rate requires two primary pieces of data: the Net Operating Income (NOI) and the Current Market Value (or purchase price). The formula is expressed as:

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

Step-by-Step Calculation Guide

  1. Determine Gross Annual Income: Multiply your monthly rental income by 12.
  2. Calculate Annual Operating Expenses: Total all costs required to keep the property running. This includes property taxes, insurance, repairs, property management fees, and utilities not paid by tenants. Note: Do not include mortgage interest or principal payments here.
  3. Find the Net Operating Income (NOI): Subtract the annual operating expenses from the gross annual income.
  4. Divide by Property Value: Divide the NOI by the acquisition price or current market value.
  5. Convert to Percentage: Multiply by 100 to get the final Cap Rate percentage.

Realistic Example

Imagine you are looking at a duplex priced at $600,000. Each unit rents for $2,000 per month, totaling $4,000 in monthly gross income. Your monthly expenses (taxes, insurance, and maintenance) average $1,200.

  • Annual Gross Income: $4,000 × 12 = $48,000
  • Annual Expenses: $1,200 × 12 = $14,400
  • NOI: $48,000 – $14,400 = $33,600
  • Cap Rate Calculation: ($33,600 / $600,000) = 0.056
  • Result: 5.6% Cap Rate

What is a "Good" Cap Rate?

A "good" cap rate depends entirely on the market and the risk profile. In stable, high-demand metropolitan areas (Core markets), cap rates might be as low as 3% to 5%. In smaller, rural, or emerging markets where the risk is higher but the cash flow is better, you might see cap rates of 8% to 12%. Investors use this number to compare different properties quickly and determine if the income justifies the asking price.

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