Property Details
Annual Expenses
Capitalization Rate
0.00%
Effective Gross Income:
$0
Total Operating Expenses:
$0
Net Operating Income (NOI):
$0
Enter your property details and expenses to calculate the Cap Rate.
What is a Cap Rate?
The Capitalization Rate (Cap Rate) is one of the most popular metrics in commercial and investment real estate. It describes the rate of return that is expected to be generated on a real estate investment property. Basically, it answers the question: "If I paid cash for this property, what percentage return would I make annually?"
How to Calculate Cap Rate
The formula for calculating Cap Rate is relatively simple:
Cap Rate = (Net Operating Income / Current Market Value) × 100
Key Terms Explained
- Net Operating Income (NOI): This is your annual revenue minus all operating expenses. It does not include mortgage payments (debt service).
- Gross Rental Income: The total amount of money collected from rent before any expenses are deducted.
- Vacancy Rate: An estimate of the percentage of time the property will sit empty and not generate income.
- Operating Expenses: Costs required to run the property, including taxes, insurance, management fees, and maintenance.
What is a "Good" Cap Rate?
There is no single "good" Cap Rate, as it depends heavily on the risk of the investment and the location. However, generally speaking:
- 4% – 5%: Often associated with lower risk, high-demand areas (e.g., city centers). Asset value is likely preserved, but cash flow is lower.
- 6% – 8%: A balanced range for many residential investment properties.
- 8% – 10%+: Often associated with higher risk properties or rural areas where appreciation may be slower, but immediate cash flow is higher.
Always remember that Cap Rate does not account for mortgage financing. To understand your return with leverage, you should calculate the Cash-on-Cash Return.