Cap Rate (Capitalization Rate) Calculator
Exclude mortgage payments (Taxes, Insurance, HOA, Maintenance)
Please enter valid positive numbers for Price and Rent.
Gross Annual Income:
$0.00
Vacancy Loss:
-$0.00
Effective Gross Income:
$0.00
Annual Operating Expenses:
-$0.00
Net Operating Income (NOI):
$0.00
Capitalization Rate:
0.00%
What is Capitalization Rate (Cap Rate)?
The Capitalization Rate, often shortened to "Cap Rate," is one of the most fundamental metrics in commercial and residential real estate investing. It measures the expected rate of return on an investment property based on the income the property is expected to generate.
Unlike cash-on-cash return, the Cap Rate does not take financing (mortgage debt) into account. This makes it an excellent tool for comparing the raw profitability of different properties relative to their market value, assuming an all-cash purchase.
The Cap Rate Formula
The formula used in the calculator above is straightforward:
Cap Rate = (Net Operating Income / Current Market Value) × 100
- Net Operating Income (NOI): This is your annual revenue minus all necessary operating expenses.
- Current Market Value: The present value of the property or the purchase price.
How to Calculate NOI Correctly
To get an accurate Cap Rate, you must calculate the Net Operating Income (NOI) correctly. Many beginners make the mistake of deducting mortgage payments.
NOI generally includes:
- Income: Rent, parking fees, laundry service income.
- Expenses (Deducted): Property taxes, insurance, property management fees, maintenance, repairs, landscaping, and utilities.
- Excluded: Mortgage principal and interest, capital expenditures (like a new roof), and depreciation.
What is a Good Cap Rate?
"What is a good Cap Rate?" is the most common question among investors. The answer depends heavily on the location and the risk level of the asset.
- 4% – 6%: Often seen in high-demand, low-risk areas (like downtown New York or San Francisco). While the return is lower, the asset is usually safer and appreciates more over time.
- 6% – 8%: Considered a healthy balance between risk and return for many suburban markets.
- 8% – 12%+: Typical of higher-risk areas or rural markets. While the cash flow looks great on paper, these properties may have higher vacancy rates or require more management effort.
Example Calculation
Let's say you are looking at a duplex listed for $400,000.
- The property generates $3,500 in monthly rent ($42,000 annually).
- You estimate a 5% vacancy rate ($2,100 loss).
- Annual operating expenses (taxes, insurance, repairs) total $12,000.
Step 1: Calculate Effective Gross Income
$42,000 (Rent) – $2,100 (Vacancy) = $39,900
Step 2: Calculate NOI
$39,900 (Income) – $12,000 (Expenses) = $27,900
Step 3: Calculate Cap Rate
($27,900 / $400,000) = 0.06975 or 6.98%
Use the calculator above to run these numbers quickly for any property you are analyzing.