Cap Rate Calculator
Calculate the Capitalization Rate for your real estate investments.
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Capitalization Rate (Cap Rate)
0.00%
Net Operating Income (NOI)
$0
Per Year
Gross Annual Income:
$0
Vacancy Loss:
$0
Total Annual Expenses:
$0
What is Cap Rate in Real Estate?
The Capitalization Rate, or "Cap Rate," is one of the most fundamental metrics used by real estate investors to evaluate the profitability and return potential of an investment property. It represents the ratio between the Net Operating Income (NOI) produced by the asset and its current market value or acquisition price.
Cap Rate essentially tells you the annual percentage return you can expect from a property if you were to buy it entirely with cash, without any mortgage financing. This allows investors to compare properties apples-to-apples, regardless of how they are financed.
How to Calculate Cap Rate
The formula for calculating Cap Rate is straightforward, but it requires accurate inputs regarding income and expenses.
Cap Rate = (Net Operating Income / Property Value) × 100
To derive the Net Operating Income (NOI), you must follow these steps:
- Calculate Gross Income: Sum up all rental income for the year.
- Subtract Vacancy: Deduct potential income lost due to vacancies (usually 5-10%).
- Subtract Operating Expenses: Deduct all costs required to run the property, such as taxes, insurance, maintenance, and management fees. Note: Mortgage payments are NOT included in NOI.
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% – 6%: Often seen in high-demand, low-risk areas (like city centers) where property appreciation is the primary goal.
- 6% – 8%: A balanced range for many residential investment properties, offering a mix of cash flow and stability.
- 8% – 12%+: Typically found in riskier markets or properties requiring significant renovation, but offering higher immediate cash flow.
Example Calculation
Imagine you are looking at a duplex listed for $500,000.
- Gross Rental Income: $4,000/month × 12 = $48,000/year
- Vacancy (5%): $2,400
- Operating Expenses: $15,600 (Taxes, Insurance, Maintenance)
NOI Calculation: $48,000 – $2,400 – $15,600 = $30,000
Cap Rate: ($30,000 / $500,000) = 0.06 or 6.00%
This means if you bought the property for cash, you would earn a 6% annual return on your investment from rent alone.