Capitalization Rate (Cap Rate) Calculator
Evaluate the profitability of your real estate investment instantly.
Please enter valid positive numbers for Property Value, Rent, and Expenses.
What is Capitalization Rate (Cap Rate)?
The Capitalization Rate, or "Cap Rate," is a fundamental metric used in commercial and residential real estate to indicate the rate of return that is expected to be generated on a real estate investment property. Unlike ROI, which calculates return based on the cash actually invested (including leverage/mortgages), Cap Rate calculates return based on the property earning potential assuming an all-cash purchase.
This metric is essential for comparing different investment opportunities regardless of how they are financed. It focuses purely on the property's ability to generate income relative to its market value.
The Cap Rate Formula
Our calculator uses the standard real estate formula:
Cap Rate = (Net Operating Income / Current Market Value) × 100
Understanding the Variables:
- Net Operating Income (NOI): This is your total annual revenue (Rent + Other Income) minus all necessary operating expenses.
- Operating Expenses: Includes property taxes, insurance, management fees, maintenance, utilities, and vacancy reserves. Note: Mortgage payments (principal and interest) are NOT included in NOI.
- Current Market Value: The present value of the property or the purchase price.
Example Calculation
Imagine you are looking to buy a duplex for $500,000.
- You charge $2,500 per month for each unit ($5,000 total monthly rent).
- Your Annual Gross Income is $60,000 ($5,000 × 12).
- Your annual costs (taxes, repairs, insurance) total $15,000.
Step 1: Calculate NOI
$60,000 (Income) – $15,000 (Expenses) = $45,000
Step 2: Calculate Cap Rate
($45,000 / $500,000) = 0.09 or 9.0%
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. However, general guidelines suggest:
- 4% to 5%: Often found in high-demand "Class A" areas (e.g., downtown NYC or SF). These represent lower risk but lower immediate returns.
- 6% to 8%: A common target for many residential investors in stable suburban markets.
- 8% to 10%+: Often found in riskier areas or properties requiring significant renovation ("value-add"). Higher risk usually commands a higher expected return.
Remember, a higher Cap Rate implies higher potential returns but often correlates with higher risk (e.g., tenant turnover, declining neighborhood).