How to Calculate Capitalization Rate Real Estate

Real Estate Capitalization Rate Calculator

Total annual rental income minus all operating expenses (taxes, insurance, maintenance).

The current market value or the price you intend to pay for the asset.

Resulting Cap Rate

0.00%

How to Calculate Capitalization Rate

The capitalization rate (or "cap rate") is one of the most critical metrics used in real estate investing 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 asset is purchased for cash.

The Cap Rate Formula

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

Key Components

• Net Operating Income (NOI): This is the annual income generated by the property after deducting all necessary operating expenses (property taxes, insurance, management fees, repairs). Note: NOI does not include mortgage payments or capital expenditures.
• Current Market Value: This is the present-day value of the property or the purchase price offered by the investor.

Example Calculation

Imagine a multi-family building that generates $120,000 in annual rent. After paying $40,000 for taxes, insurance, and maintenance, the Net Operating Income (NOI) is $80,000. If the property is listed for $1,000,000, the calculation would be:

($80,000 / $1,000,000) × 100 = 8.00% Cap Rate

Why Cap Rate Matters

Cap rates allow investors to compare different investment opportunities quickly. A higher cap rate generally implies a higher potential return but also higher risk. Conversely, a lower cap rate usually suggests a safer investment in a highly desirable location (like a "Class A" property in a major city center).

function calculateCapRate() { var noi = parseFloat(document.getElementById('noi').value); var value = parseFloat(document.getElementById('propertyValue').value); var display = document.getElementById('resultDisplay'); var output = document.getElementById('capRateOutput'); var interpretation = document.getElementById('interpretation'); if (isNaN(noi) || isNaN(value) || value <= 0) { alert("Please enter valid positive numbers for both fields."); return; } var capRate = (noi / value) * 100; output.innerHTML = capRate.toFixed(2) + "%"; display.style.display = "block"; var interpretationText = ""; if (capRate = 4 && capRate <= 8) { interpretationText = "This is a standard market cap rate for many residential and commercial investments."; } else { interpretationText = "This is a high cap rate, which may indicate a high-yield opportunity or a higher-risk area/property condition."; } interpretation.innerHTML = interpretationText; }