Real Estate Cap Rate Calculator
Calculate the Capitalization Rate and Net Operating Income (NOI) of your investment property.
Property Details
Annual Expenses
Capitalization Rate (Cap Rate)
0.00%
Return on investment without financing
Net Operating Income (NOI):
$0.00
Effective Gross Income:
$0.00
Total Annual Expenses:
$0.00
Quick Analysis
Enter property details to see an analysis of your investment metrics.
What is Cap Rate?
The Capitalization Rate (or "Cap Rate") is one of the most popular metrics used in commercial and residential real estate to determine 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 entirely with cash (no mortgage).
The Cap Rate formula allows investors to compare properties with different price points and rental incomes on a level playing field.
How to Calculate Cap Rate
The formula for Capitalization Rate is relatively simple:
Cap Rate = Net Operating Income (NOI) / Current Market Value
To use this calculator effectively, you need to understand the components:
- Net Operating Income (NOI): This is your total annual revenue (rent + other income) minus all necessary operating expenses. Note that NOI excludes mortgage payments (principal and interest).
- Current Market Value: This is typically the purchase price of the property or its current appraised value.
Example Calculation
Let's look at a realistic example of how the math works:
- Purchase Price: $500,000
- Gross Rental Income: $4,500/month ($54,000/year)
- Vacancy Loss (5%): $2,700
- Operating Expenses: $12,300 (Taxes, Insurance, Maintenance)
First, calculate the NOI: ($54,000 – $2,700) – $12,300 = $39,000.
Next, divide NOI by the price: $39,000 / $500,000 = 0.078.
The Cap Rate is 7.8%.
What is a "Good" Cap Rate?
There is no single "good" Cap Rate, as it varies heavily by location, property type, and the current economic environment. Generally:
- 4% – 6%: Common in high-demand "Grade A" areas (low risk, high appreciation potential).
- 6% – 8%: Often considered a healthy balance between risk and return in stable residential neighborhoods.
- 8% – 12%+: Typical in riskier areas or older properties that may require more management and maintenance.
Use this calculator to quickly screen properties. If a property's Cap Rate is significantly lower than the market average, it may be overpriced. If it's significantly higher, there may be hidden risks or deferred maintenance issues.