Cap Rate Calculator
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Include taxes, insurance, maintenance, management.
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Gross Annual Income
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Net Operating Income (NOI)
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Capitalization Rate
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What is a Cap Rate?
The Capitalization Rate (or "Cap Rate") is one of the most fundamental metrics used in commercial and residential real estate investing. It measures the rate of return on a real estate investment property based on the income that the property is expected to generate.
Unlike other metrics like ROI (Return on Investment) or Cash-on-Cash Return, the Cap Rate focuses specifically on the property's natural ability to generate revenue, independent of how the purchase was financed. This makes it an excellent tool for comparing the relative value of different properties.
Formula: Cap Rate = (Net Operating Income / Current Market Value) × 100
Understanding the Inputs
To get an accurate result from our Cap Rate Calculator, it is crucial to understand the three main components:
- Property Price: This is the total purchase price or current market value of the asset.
- Gross Income: The total rental income the property generates in a year (Monthly Rent × 12). Remember to account for vacancy rates; our calculator subtracts vacancy loss to find the effective gross income.
- Operating Expenses: These are the costs required to run the property, such as property management fees, taxes, insurance, repairs, and maintenance. Note: Mortgage payments are NOT included in operating expenses when calculating Cap Rate.
What is a Good Cap Rate?
There is no single "good" Cap Rate, as it varies significantly by location, property type, and the current economic environment. Generally:
- 4% – 6%: Common in high-demand, low-risk areas (like downtown NYC or San Francisco). These properties are safer but offer lower immediate returns.
- 6% – 8%: A balanced range often found in suburban areas or growing secondary markets.
- 8% – 12%+: Typical for higher-risk properties, older buildings, or rural areas. These offer higher cash flow to compensate for the increased risk of vacancy or maintenance issues.
Why Investors Use This Metric
The Cap Rate allows investors to assess the profitability of a property quickly. If you pay all cash for a property, the Cap Rate is effectively your annual return on investment. If you are financing the deal, the Cap Rate helps determine if the income will cover your mortgage interest rate. Ideally, you want a Cap Rate that is higher than your interest rate to ensure positive leverage.