How to Calculate Cap Rate on Rental

Capitalization Rate (Cap Rate) Calculator

Include taxes, insurance, repairs, and management fees. Do NOT include mortgage payments.

Net Operating Income (NOI):

Cap Rate: %

function calculateCapRate() { var purchasePrice = parseFloat(document.getElementById('purchasePrice').value); var monthlyRent = parseFloat(document.getElementById('monthlyRent').value); var annualExpenses = parseFloat(document.getElementById('annualExpenses').value); var resultsArea = document.getElementById('resultsArea'); if (isNaN(purchasePrice) || isNaN(monthlyRent) || isNaN(annualExpenses) || purchasePrice <= 0) { alert("Please enter valid positive numbers for all fields."); return; } var annualGrossIncome = monthlyRent * 12; var netOperatingIncome = annualGrossIncome – annualExpenses; var capRate = (netOperatingIncome / purchasePrice) * 100; document.getElementById('noiResult').innerHTML = "$" + netOperatingIncome.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); document.getElementById('capRateResult').innerHTML = capRate.toFixed(2); resultsArea.style.display = 'block'; }

Understanding Cap Rate in Real Estate Investing

The Capitalization Rate, or Cap Rate, is one of the most fundamental metrics used in commercial and residential real estate to evaluate the profitability and potential return on an investment property. It represents the yield of a property over a one-year time horizon assuming the property is purchased for cash (without debt).

The Cap Rate Formula

To calculate the cap rate, you divide the property's Net Operating Income (NOI) by its current market value or purchase price:

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

Step-by-Step Calculation Example

Imagine you are looking at a rental property with the following financials:

• Purchase Price: $500,000
• Monthly Rent: $4,000 ($48,000 per year)
• Operating Expenses: $12,000 per year (Property tax, insurance, maintenance)

Step 1: Calculate Net Operating Income (NOI)
Annual Gross Income ($48,000) – Annual Expenses ($12,000) = $36,000 NOI.

Step 2: Apply the Formula
($36,000 / $500,000) = 0.072.

Step 3: Convert to Percentage
0.072 x 100 = 7.2% Cap Rate.

What is a "Good" Cap Rate?

A "good" cap rate is subjective and depends heavily on the location and asset class. Generally:

• 4% to 5%: Often found in high-demand, low-risk "Gateway" cities (like NYC or San Francisco). These properties offer lower returns but higher stability and appreciation potential.
• 6% to 8%: Typical for stable suburban markets with moderate growth.
• 10%+: Usually found in higher-risk areas or properties requiring significant management. While the yield is high, the risk of vacancy or repair costs is often higher.

Important Limitations

It is crucial to remember that the cap rate does not include mortgage payments. It is a tool to compare the intrinsic value of properties regardless of how they are financed. To understand your actual cash return after paying the bank, you should calculate the "Cash-on-Cash Return" instead.