Prabhu Bank Interest Rate Calculator

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Real Estate Cap Rate Calculator

Determine the potential return on your real estate investment.

Includes taxes, insurance, maintenance, HOA

Average is typically 5-8%

Calculation Results

Net Operating Income (NOI): $0.00
Capitalization Rate: 0.00%

function calculateCapRate() { var price = parseFloat(document.getElementById('propertyPrice').value); var monthlyIncome = parseFloat(document.getElementById('monthlyIncome').value); var annualExpenses = parseFloat(document.getElementById('annualExpenses').value); var vacancyRate = parseFloat(document.getElementById('vacancyRate').value); if (isNaN(price) || isNaN(monthlyIncome) || isNaN(annualExpenses) || price <= 0) { alert("Please enter valid numbers for all fields. Purchase price must be greater than zero."); return; } if (isNaN(vacancyRate)) { vacancyRate = 0; } // Calculations var grossAnnualIncome = monthlyIncome * 12; var vacancyLoss = grossAnnualIncome * (vacancyRate / 100); var effectiveGrossIncome = grossAnnualIncome – vacancyLoss; var noi = effectiveGrossIncome – annualExpenses; var capRate = (noi / price) * 100; // Display Results document.getElementById('displayNOI').innerHTML = "$" + noi.toLocaleString('en-US', {minimumFractionDigits: 2, maximumFractionDigits: 2}); document.getElementById('displayCapRate').innerHTML = capRate.toFixed(2) + "%"; var feedback = ""; if (capRate = 4 && capRate 8 && capRate < 12) { feedback = "This is a strong return, often found in emerging markets or properties requiring some value-add."; } else { feedback = "A Cap Rate this high often correlates with higher risk assets or distressed properties."; } document.getElementById('capRateFeedback').innerHTML = feedback; document.getElementById('resultsArea').style.display = 'block'; }

Understanding Capitalization Rate (Cap Rate)

The Capitalization Rate, commonly known as Cap Rate, is one of the most fundamental metrics used in commercial and residential real estate investing. It calculates the rate of return on a real estate investment property based on the income that the property is expected to generate. This metric specifically measures the yield of a property over a one-year time horizon assuming the property is purchased for cash, without taking financing (mortgages) into account.

How is Cap Rate Calculated?

The formula for calculating Cap Rate is relatively straightforward but requires accurate inputs to be effective. The formula is:

Cap Rate = (Net Operating Income / Current Market Value) × 100%

To derive these numbers, you must break down the components:

  • Net Operating Income (NOI): This is your annual revenue minus all necessary operating expenses. Revenue includes rent and other income (like parking or laundry fees). Operating expenses include property taxes, insurance, management fees, and maintenance costs. Note that NOI does not include mortgage payments or capital expenditures (like a new roof).
  • Current Market Value: This is typically the purchase price of the property or its current appraised value.

Example Calculation

Let's say you are considering buying a duplex for $300,000.

  1. The property generates $2,500 per month in rent ($30,000 annually).
  2. You estimate a 5% vacancy rate, which reduces gross income by $1,500.
  3. Your operating expenses (taxes, insurance, repairs) total $8,000 per year.

Step 1: Calculate NOI
$30,000 (Gross Income) – $1,500 (Vacancy) – $8,000 (Expenses) = $20,500 (NOI)

Step 2: Calculate Cap Rate
($20,500 / $300,000) = 0.0683 or 6.83%

What is a Good Cap Rate?

A "good" Cap Rate is subjective and depends heavily on the risk level of the asset and the location of the property. Generally:

  • 4% to 5%: Often seen in "Class A" properties in high-demand cities (e.g., NYC, San Francisco). These are low-risk but offer lower annual returns.
  • 6% to 8%: Considered a balanced target for most residential investors, offering a mix of reasonable cash flow and potential appreciation.
  • 8% to 12%+: Common in riskier neighborhoods, rural areas, or properties that require significant renovation. These offer high cash flow to offset the increased risk.

Use the calculator above to quickly analyze potential deals and filter out properties that do not meet your investment criteria.

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