Real Estate Cap Rate & NOI Calculator
Analyze the profitability of your next investment property.
What is Capitalization Rate (Cap Rate)?
The Capitalization Rate, commonly known as the Cap Rate, is one of the most vital metrics used in commercial and residential real estate investment. It represents the expected annual rate of return on an investment property, assuming the asset is purchased with cash (no financing).
Cap rate allows investors to compare different real estate opportunities quickly by stripping away the impact of mortgage financing, which varies from buyer to buyer, and focusing purely on the property's ability to generate income.
The Cap Rate Formula
Calculating the Cap Rate is straightforward once you have determined the Net Operating Income (NOI). The formula is:
Cap Rate = (Net Operating Income / Purchase Price) × 100
How to Calculate Net Operating Income (NOI)
To find your NOI, you must subtract all operating expenses from your gross rental income. Operating expenses include:
- Property Taxes
- Property Insurance
- Maintenance and Repairs
- Utilities (if paid by the landlord)
- Property Management Fees
- Landscaping and Cleaning
Note: NOI does not include mortgage interest, depreciation, or capital improvements (CapEx like a new roof).
A Practical Example
Imagine you are looking at a multi-family property priced at $800,000. It generates $96,000 in annual rent. After paying $12,000 in taxes, $3,000 in insurance, and $11,000 in management and repairs, your total expenses are $26,000.
- Gross Income: $96,000
- Total Expenses: $26,000
- NOI: $96,000 – $26,000 = $70,000
- Cap Rate: ($70,000 / $800,000) = 8.75%
An 8.75% Cap Rate suggests a healthy yield for many markets, though "good" cap rates vary significantly by city, property type, and economic conditions.
Why Cap Rates Matter for Investors
High cap rates usually indicate higher risk but higher potential return, often found in older properties or developing neighborhoods. Low cap rates (e.g., 3-5%) are typical for "Class A" properties in stable, high-demand metropolitan areas like New York or London, where the asset is considered safer and more likely to appreciate in value over the long term.