Rental Property Cap Rate Calculator
(Include taxes, insurance, maintenance, property management. Exclude mortgage payments.)
How to Calculate Cap Rate for Rental Property
The Capitalization Rate (Cap Rate) is one of the most critical metrics used by real estate investors to evaluate the profitability and return potential of an income-producing property. It represents the yield of a property over a one-year time horizon assuming the property is purchased with cash.
The Cap Rate Formula
Cap Rate = (Net Operating Income / Current Market Value) × 100
Understanding the Components
- Net Operating Income (NOI): This is your Gross Rental Income minus all necessary operating expenses (property taxes, insurance, maintenance, utilities, and management fees). Note: Debt service (mortgage payments) is NOT included in NOI.
- Current Market Value: The current price the property would sell for on the open market, or the purchase price if you are evaluating a new acquisition.
Realistic Example
Imagine you are looking at a duplex with a purchase price of $500,000.
• Annual Rental Income: $48,000 ($4,000/month)
• Annual Operating Expenses: $12,000 (Taxes, Insurance, Repairs)
• NOI: $48,000 – $12,000 = $36,000
• Cap Rate: ($36,000 / $500,000) × 100 = 7.2%
What is a "Good" Cap Rate?
A "good" cap rate depends on the location and asset class. In high-demand metropolitan areas, cap rates might be lower (4-5%) because the risk is perceived as lower and appreciation potential is higher. In rural or developing areas, investors often look for higher cap rates (8-10%+) to compensate for higher risks or lower appreciation.