Real Estate Cap Rate Calculator
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Capitalization Rate (Cap Rate)
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Net Operating Income (NOI)
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Effective Gross Income
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Total Annual Expenses
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What is Capitalization Rate?
The Capitalization Rate (or "Cap Rate") is one of the most fundamental metrics in commercial and residential real estate investing. It measures the rate of return on a real estate investment property based on the income the property is expected to generate. Cap Rate is essentially a way to evaluate the profitability and risk potential of a property independent of its financing method.
Unlike Cash-on-Cash Return, which factors in your mortgage and down payment, Cap Rate assumes the property is purchased with 100% cash. This allows investors to compare properties "apples-to-apples" without the distortion of different loan terms.
How to Calculate Cap Rate
The formula for calculating Cap Rate is straightforward:
Cap Rate = (Net Operating Income / Current Market Value) × 100
To use this formula efficiently, you must understand the components:
- Net Operating Income (NOI): This is your annual revenue minus all necessary operating expenses. NOI excludes principal and interest payments on loans, capital expenditures (like a new roof), and depreciation.
- Operating Expenses: These include property management fees, property taxes, insurance, utilities paid by the owner, and routine maintenance.
- Market Value: The current purchase price or appraised value of the property.
Example Calculation
Let's say you are looking to buy a duplex for $500,000. Here is how the numbers might break down:
| Item | Amount |
|---|---|
| Monthly Rent | $4,500 |
| Annual Gross Income ($4,500 × 12) | $54,000 |
| Less: Vacancy (5%) | -$2,700 |
| Less: Annual Expenses (Taxes, Ins, Maint) | -$15,000 |
| Net Operating Income (NOI) | $36,300 |
Using the formula: ($36,300 / $500,000) = 0.0726.
Your Cap Rate is 7.26%.
What is a "Good" Cap Rate?
There is no single "good" Cap Rate, as acceptable rates vary by location, asset class, and economic conditions. However, generally speaking:
- 4% to 5%: Often found in high-demand, low-risk areas (like downtown San Francisco or NYC). Properties here appreciate faster but yield less cash flow.
- 6% to 8%: A common target for many residential investors in stable suburban markets. Offers a balance of safety and income.
- 8% to 12%+: Typical in riskier markets or rural areas where appreciation is lower, but immediate cash flow is higher.
Why Use a Cap Rate Calculator?
Using a dedicated Cap Rate Calculator helps investors quickly screen multiple properties. By inputting the rent, price, and estimated expenses, you can immediately filter out properties that do not meet your investment criteria. Remember, a higher Cap Rate usually implies higher risk, while a lower Cap Rate implies a safer, more stable asset.