Real Estate Capitalization Rate (Cap Rate) Calculator
Calculate the Cap Rate of a potential real estate investment to evaluate its profitability and return on investment potential accurately.
Estimate of time property sits empty.
Investment Analysis
Gross Annual Income:
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Vacancy Loss:
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Effective Gross Income:
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Total Annual Expenses:
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Net Operating Income (NOI):
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Capitalization Rate (Cap Rate):
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What is Cap Rate in Real Estate?
The Capitalization Rate, or Cap Rate, is one of the most fundamental metrics used by real estate investors to evaluate the profitability of an investment property. It represents the ratio of Net Operating Income (NOI) to the property's asset value (current market value or purchase price).
Unlike ROI (Return on Investment), Cap Rate ignores debt service (mortgage payments). This allows investors to compare properties on an apples-to-apples basis, focusing strictly on the property's ability to generate income regardless of how it is financed.
How to Calculate Cap Rate
The formula for calculating Cap Rate is straightforward:
Cap Rate = (Net Operating Income / Current Market Value) × 100%
Step-by-Step Calculation:
- Determine Gross Annual Income: Multiply monthly rent by 12.
- Subtract Vacancy: Deduct a percentage for expected vacancy losses (typically 5-10%).
- Calculate Operating Expenses: Sum up taxes, insurance, maintenance, management fees, and utilities. Do not include mortgage principal or interest.
- Determine Net Operating Income (NOI): Subtract Total Operating Expenses from the Effective Gross Income.
- Divide by Price: Divide the NOI by the property's purchase price or market value.
What is a Good Cap Rate?
A "good" cap rate is subjective and depends heavily on the location, property type, and current economic environment. Generally:
- 4% – 6%: Common in high-demand, low-risk areas (e.g., city centers like NYC or San Francisco). Lower risk, but lower cash flow.
- 6% – 8%: Often considered a healthy balance for residential rental properties in stable suburban markets.
- 8% – 12%+: Typical in riskier markets or rural areas. These properties may offer higher cash flow but come with higher risks regarding tenant stability or property appreciation.
Cap Rate vs. Cash-on-Cash Return
While Cap Rate measures the raw potential of the property, Cash-on-Cash Return measures the return on the actual cash invested. If you are paying all cash for a property, your Cap Rate and Cash-on-Cash Return will be the same. If you are using leverage (a mortgage), your Cash-on-Cash return may be higher or lower depending on the interest rate.