Duplex Cap Rate Calculator
Analyze your 2-unit multi-family investment profitability.
How to Calculate Cap Rate on a Duplex
The capitalization rate, or "cap rate," is a fundamental metric used by real estate investors to evaluate the profitability and return potential of a duplex. Unlike a single-family home where "comps" drive value, a duplex is often valued based on the income it generates.
The Duplex Cap Rate Formula
To calculate the cap rate, you use the following formula:
Cap Rate = (Net Operating Income / Current Market Value) × 100
Step-by-Step Breakdown
1. Calculate Gross Scheduled Income: Add the monthly rent of both units and multiply by 12. If Unit A is $1,200 and Unit B is $1,200, your annual gross is $28,800.
2. Account for Vacancy: No duplex stays 100% occupied forever. Subtract a vacancy factor (typically 5% to 10%) from your gross income to get your Effective Gross Income.
3. List Operating Expenses: These are the costs required to keep the property running. This includes property taxes, insurance, repairs, landscaping, and property management fees. Important: Do not include mortgage interest or principal payments in the cap rate calculation.
4. Determine Net Operating Income (NOI): Subtract all operating expenses from your Effective Gross Income. This figure represents the cash the property produces before debt service.
Example Calculation
Imagine you buy a duplex for $400,000. Each unit rents for $1,500/month.
- Gross Annual Income: $36,000
- Vacancy (5%): $1,800
- Operating Expenses (Taxes, Insurance, Repairs): $10,000
- NOI: $36,000 – $1,800 – $10,000 = $24,200
- Cap Rate: ($24,200 / $400,000) × 100 = 6.05%
What is a Good Cap Rate for a Duplex?
A "good" cap rate depends on the location. In high-demand "Class A" neighborhoods, you might see cap rates as low as 4-5%. In developing areas or older neighborhoods, investors often look for 7-10% to compensate for the higher risk. Remember, the cap rate assumes you are buying the property with cash; it measures the property's natural yield regardless of financing.