function calculateCapRate() {
// Get Inputs
var price = parseFloat(document.getElementById('cre-price').value) || 0;
var grossRent = parseFloat(document.getElementById('cre-gross-rent').value) || 0;
var otherIncome = parseFloat(document.getElementById('cre-other-income').value) || 0;
var vacancyRate = parseFloat(document.getElementById('cre-vacancy').value) || 0;
var tax = parseFloat(document.getElementById('cre-tax').value) || 0;
var insurance = parseFloat(document.getElementById('cre-insurance').value) || 0;
var maintenance = parseFloat(document.getElementById('cre-maintenance').value) || 0;
var management = parseFloat(document.getElementById('cre-management').value) || 0;
var utilities = parseFloat(document.getElementById('cre-utilities').value) || 0;
// Validation
if (price <= 0) {
alert("Please enter a valid Purchase Price greater than zero.");
return;
}
// Calculations
var potentialGrossIncome = grossRent + otherIncome;
var vacancyLoss = potentialGrossIncome * (vacancyRate / 100);
var effectiveGrossIncome = potentialGrossIncome – vacancyLoss;
var totalExpenses = tax + insurance + maintenance + management + utilities;
var noi = effectiveGrossIncome – totalExpenses;
var capRate = (noi / price) * 100;
// Formatting currency
var formatter = new Intl.NumberFormat('en-US', {
style: 'currency',
currency: 'USD',
});
// Display Results
document.getElementById('cre-results').style.display = 'block';
document.getElementById('res-gross').innerText = formatter.format(potentialGrossIncome);
document.getElementById('res-effective').innerText = formatter.format(effectiveGrossIncome);
document.getElementById('res-expenses').innerText = formatter.format(totalExpenses);
document.getElementById('res-noi').innerText = formatter.format(noi);
document.getElementById('res-cap-rate').innerText = capRate.toFixed(2) + "%";
}
What is a Cap Rate?
The Capitalization Rate (often referred to as "Cap Rate") is one of the most fundamental metrics used in commercial real estate analysis. It represents the expected rate of return on a real estate investment property based on the income the property is expected to generate. Essentially, it helps investors determine the yield of a property over a one-year time horizon, assuming the property was purchased with all cash (no mortgage financing).
Cap rates are expressed as a percentage and provide a quick way to compare the relative value of different potential investment properties across different markets.
How is Cap Rate Calculated?
The formula for calculating the Capitalization Rate is relatively straightforward, yet obtaining accurate inputs is crucial for a realistic valuation. The formula is:
Cap Rate = Net Operating Income (NOI) / Current Market Value (Purchase Price)
1. Net Operating Income (NOI)
NOI is the annual income generated by an income-producing property after deducting all operating expenses but before deducting taxes and financing costs. To calculate NOI:
Gross Income: Sum of all rental income and other income sources (parking, vending, etc.).
Vacancy Loss: Subtract estimated revenue lost due to unoccupied units.
Operating Expenses: Subtract costs necessary to run the property, such as insurance, property management fees, utilities, taxes, and maintenance.
2. Property Value
This is simply the purchase price of the asset or its current market value.
What is a "Good" Cap Rate?
There is no single "good" cap rate that applies to every investor or property. A good cap rate is subjective and depends on several factors:
Risk Tolerance: Higher cap rates generally imply higher risk (and potentially higher return), while lower cap rates usually indicate safer, more stable assets (like Class A buildings in prime locations).
Asset Class: Multifamily apartments, retail centers, and industrial warehouses all trade at different average cap rates.
Market Location: A property in downtown New York City might have a 4% cap rate, while a similar property in a rural area might trade at 8% or 9%.
Generally, a cap rate between 4% and 10% is considered typical for most commercial investments, but investors must weigh this against interest rates and the condition of the property.
Why Use a Cap Rate Calculator?
Using this Commercial Real Estate Cap Rate Calculator allows investors to quickly filter through potential deals. If a property lists a purchase price of $1,000,000 but only generates $30,000 in NOI (a 3% cap rate), and the market average is 6%, the property may be overpriced. Conversely, finding a property with a high cap rate relative to the market might uncover a hidden gem—or a distressed asset requiring significant work.