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Real Estate Cap Rate Calculator

*Calculation excludes mortgage/financing costs.

What is a Capitalization Rate (Cap Rate)?

The Capitalization Rate, commonly referred to as "Cap Rate," is a fundamental metric used in commercial and residential real estate to evaluate the profitability and return potential of an investment property. It represents the ratio of Net Operating Income (NOI) to the property's asset value (or purchase price).

Unlike Cash-on-Cash return, Cap Rate measures the natural rate of return of the property itself, independent of how the purchase is financed. This allows investors to compare properties directly, whether they are paying all cash or taking out a loan.

How to Calculate Cap Rate

The formula for calculating Cap Rate is straightforward:

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

Where Net Operating Income (NOI) is calculated by subtracting all operating expenses (taxes, insurance, maintenance, property management) from the total income generated by the property. Note that mortgage payments (debt service) are not included in operating expenses for this calculation.

Example Calculation

Let's look at a realistic scenario using the calculator above:

• Purchase Price: $250,000
• Gross Annual Rent: $30,000 ($2,500/month)
• Vacancy Rate: 5% ($1,500 loss)
• Operating Expenses: $8,000 (Tax, Insurance, Repairs)

First, we determine the Effective Gross Income: $30,000 – $1,500 = $28,500.
Next, we find the NOI: $28,500 – $8,000 = $20,500.
Finally, the Cap Rate: ($20,500 / $250,000) = 8.2%.

What is a "Good" Cap Rate?

There is no single answer to what constitutes a "good" cap rate, as it varies significantly by location, property type, and economic conditions. However, here are general guidelines:

• 4% – 5%: Common in high-demand, low-risk areas (Tier 1 cities like NYC or San Francisco). Properties here tend to appreciate in value faster.
• 6% – 8%: Often considered a healthy balance between risk and return in suburban areas or stabilizing markets.
• 8% – 12%+: Typically found in higher-risk areas, older properties requiring renovation, or rural markets. While the return is higher, the risk of vacancy or major repairs is also elevated.

Why Financing Matters

Remember that Cap Rate assumes an all-cash purchase. If you are financing the deal, your actual Cash-on-Cash Return may differ. If your interest rate is lower than the Cap Rate, you have positive leverage, which boosts your overall return.

function calculateCapRate() { // Get Input Values var price = parseFloat(document.getElementById('propertyPrice').value); var monthlyRent = parseFloat(document.getElementById('monthlyRent').value); var vacancyRate = parseFloat(document.getElementById('vacancyRate').value); var annualExpenses = parseFloat(document.getElementById('annualExpenses').value); // Validation checks if (isNaN(price) || price <= 0) { alert("Please enter a valid Property Purchase Price."); return; } if (isNaN(monthlyRent) || monthlyRent < 0) { alert("Please enter a valid Monthly Rental Income."); return; } if (isNaN(annualExpenses) || annualExpenses 0) { capRate = (noi / price) * 100; } // Formatting Function function formatCurrency(num) { return '$' + num.toLocaleString(undefined, {minimumFractionDigits: 0, maximumFractionDigits: 0}); } // Display Results document.getElementById('results-area').style.display = 'block'; document.getElementById('grossIncomeResult').innerText = formatCurrency(grossAnnualIncome); document.getElementById('vacancyLossResult').innerText = '-' + formatCurrency(vacancyAmount); document.getElementById('noiResult').innerText = formatCurrency(noi); // Handle negative NOI or weird edge cases if (noi < 0) { document.getElementById('noiResult').style.color = '#dc3545'; } else { document.getElementById('noiResult').style.color = '#2c3e50'; } document.getElementById('capRateResult').innerText = capRate.toFixed(2) + '%'; // Scroll to results for mobile users document.getElementById('results-area').scrollIntoView({ behavior: 'smooth', block: 'nearest' }); }