Real Estate Cap Rate Calculation

Include taxes, insurance, maintenance, and management fees. Do NOT include mortgage payments.

Calculation Results

Net Operating Income (NOI):

Capitalization Rate:

Understanding the Capitalization Rate (Cap Rate)

The Capitalization Rate, or "Cap Rate," is one of the most fundamental metrics used in commercial and residential real estate investment. It represents the expected annual rate of return on an investment property, assuming the property is purchased with cash (no financing). It allows investors to compare different real estate opportunities quickly by looking at the property's yield independent of the buyer's specific mortgage terms.

The Cap Rate Formula

To calculate the Cap Rate, you must first determine the Net Operating Income (NOI). The formula is as follows:

Net Operating Income (NOI) = Gross Rental Income – Operating Expenses
Cap Rate = (NOI / Current Market Value) × 100

What is a "Good" Cap Rate?

There is no single "correct" cap rate. Generally, a higher cap rate suggests a higher potential return, but it often comes with higher risk. Factors that influence cap rates include:

• Location: Properties in prime "Tier 1" cities (like NYC or London) often have lower cap rates because they are seen as safer investments.
• Property Type: Industrial, retail, multi-family, and office spaces all have different average cap rates based on market demand.
• Property Condition: A "turn-key" property usually has a lower cap rate than a "fixer-upper" because the risk of immediate capital expenditure is lower.

Example Calculation

Imagine you are looking at a multi-family apartment building with the following figures:

• Purchase Price: $1,200,000
• Annual Rent Collected: $120,000
• Annual Expenses (Tax, Insurance, Repairs): $30,000

First, calculate the NOI: $120,000 – $30,000 = $90,000.
Then, divide the NOI by the purchase price: $90,000 / $1,200,000 = 0.075.
Multiply by 100 to get the percentage: 7.5% Cap Rate.

Important Limitation

The Cap Rate does not take into account mortgage payments (debt service), tax implications, or future property appreciation. While it is excellent for comparing the profitability of similar assets, it should be used alongside other metrics like Cash-on-Cash Return and Internal Rate of Return (IRR).

function calculateCapRate() { var propertyValue = parseFloat(document.getElementById("propertyValue").value); var grossIncome = parseFloat(document.getElementById("grossIncome").value); var operatingExpenses = parseFloat(document.getElementById("operatingExpenses").value); if (isNaN(propertyValue) || isNaN(grossIncome) || isNaN(operatingExpenses) || propertyValue <= 0) { alert("Please enter valid positive numbers for all fields."); return; } var noi = grossIncome – operatingExpenses; var capRate = (noi / propertyValue) * 100; document.getElementById("noiDisplay").innerText = "$" + noi.toLocaleString(undefined, {minimumFractionDigits: 2, maximumFractionDigits: 2}); document.getElementById("capRateResult").innerText = capRate.toFixed(2) + "%"; document.getElementById("resultsArea").style.display = "block"; }