Includes taxes, insurance, maintenance, management fees.
Please enter valid positive numbers for all fields.
Effective Gross Income:–
Net Operating Income (NOI):–
Cap Rate:–
function calculateCapRate() {
var priceInput = document.getElementById('propertyPrice').value;
var grossInput = document.getElementById('grossIncome').value;
var vacancyInput = document.getElementById('vacancyRate').value;
var expensesInput = document.getElementById('operatingExpenses').value;
var errorDiv = document.getElementById('crError');
var resultDiv = document.getElementById('crResult');
// Reset display
errorDiv.style.display = 'none';
resultDiv.style.display = 'none';
// Parse values
var price = parseFloat(priceInput);
var gross = parseFloat(grossInput);
var vacancy = parseFloat(vacancyInput);
var expenses = parseFloat(expensesInput);
// Validation
if (isNaN(price) || isNaN(gross) || isNaN(vacancy) || isNaN(expenses) || price <= 0) {
errorDiv.innerText = "Please enter valid values. Purchase price must be greater than zero.";
errorDiv.style.display = 'block';
return;
}
// Calculation Logic
// 1. Calculate Effective Gross Income (Gross – Vacancy Loss)
var vacancyLoss = gross * (vacancy / 100);
var effectiveGrossIncome = gross – vacancyLoss;
// 2. Calculate Net Operating Income (Effective Income – Operating Expenses)
var noi = effectiveGrossIncome – expenses;
// 3. Calculate Cap Rate (NOI / Current Market Value or Purchase Price) * 100
var capRate = (noi / price) * 100;
// Formatting currency and percentage
var formatter = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
minimumFractionDigits: 0,
maximumFractionDigits: 0,
});
document.getElementById('displayEffectiveIncome').innerText = formatter.format(effectiveGrossIncome);
document.getElementById('displayNOI').innerText = formatter.format(noi);
document.getElementById('displayCapRate').innerText = capRate.toFixed(2) + "%";
// Show result
resultDiv.style.display = 'block';
}
What is Capitalization Rate (Cap Rate)?
The Capitalization Rate, commonly referred to as the Cap Rate, is a fundamental metric used in real estate investing to estimate the potential return on an investment property. It represents the yield of a property over a one-year time horizon, assuming the property is purchased with cash and not financed with a loan.
Cap Rate essentially helps investors measure the natural rate of return provided by the property itself, allowing for a direct comparison between different properties regardless of how they are financed.
How to Calculate Cap Rate
The formula for calculating Cap Rate is relatively straightforward but requires accurate financial data regarding the property's income and expenses.
Formula: Cap Rate = (Net Operating Income / Current Market Value) × 100
Step-by-Step Calculation:
Determine Gross Rental Income: The total annual income the property would produce if fully rented.
Subtract Vacancy Losses: Account for periods when the property sits empty.
Subtract Operating Expenses: Deduct costs such as property taxes, insurance, maintenance, property management fees, and utilities. Do not include mortgage payments.
Calculate Net Operating Income (NOI): This is the result of the steps above.
Divide by Purchase Price: Divide the NOI by the property's current market value or acquisition cost.
Why is Cap Rate Important?
Cap Rate serves as a quick barometer for the risk and return of an investment property:
Comparison Tool: It allows investors to compare properties in different locations or of different types (e.g., multifamily vs. commercial) on an apples-to-apples basis.
Trend Analysis: Tracking Cap Rates in a specific market can reveal whether prices are overheating or if it's a buyer's market.
Valuation: If you know the market Cap Rate and the NOI of a property, you can estimate its fair market value.
What is a "Good" Cap Rate?
There is no single "good" Cap Rate, as it depends heavily on the risk profile of the asset and the current economic environment. However, generally speaking:
4% to 5%: Often associated with lower-risk properties in high-demand, Class A areas (e.g., downtown New York or San Francisco). While the return is lower, the asset is usually safer and appreciates more over time.
6% to 8%: Considered a healthy balance between risk and return for many residential and commercial investors in stable markets.
10% or higher: Typically associated with higher-risk properties, often in older neighborhoods or rural areas where tenant turnover might be higher or appreciation lower.
Limitations of Cap Rate
While useful, the Cap Rate should not be the only metric you use. It does not account for leverage (mortgages), future cash flow variations, or tax benefits like depreciation. Always use it in conjunction with other metrics like Cash-on-Cash Return and Internal Rate of Return (IRR).