Real Estate Cap Rate Calculator
Calculate the Capitalization Rate (Cap Rate) of a potential investment property to evaluate its profitability relative to the purchase price.
Investment Analysis
What is a Cap Rate in Real Estate?
The Capitalization Rate, or "Cap Rate," is one of the most vital metrics for real estate investors. It represents the yield of a property over a one-year time horizon assuming the property is purchased for cash. It is calculated by dividing the Net Operating Income (NOI) by the current market value or purchase price of the asset.
The Formula for Cap Rate
To calculate the cap rate manually, use this formula:
Cap Rate = (Net Operating Income / Current Market Value) × 100
Where Net Operating Income (NOI) is your Gross Annual Income minus all operating expenses (taxes, insurance, maintenance, management fees), excluding mortgage payments and depreciation.
Imagine you buy a small apartment building for $1,000,000.
The total monthly rent collected is $8,000 ($96,000/year).
After accounting for a 5% vacancy ($4,800) and annual operating expenses like taxes and repairs totaling $25,000, your NOI is $66,200.
$66,200 / $1,000,000 = 6.62% Cap Rate.
Why Cap Rate Matters
Investors use cap rates to compare different investment opportunities quickly. A "good" cap rate depends on the location and asset class. In high-demand metropolitan areas, cap rates might be lower (4-5%) because the risk is lower and appreciation potential is higher. In rural or developing areas, investors might look for higher cap rates (8-10%) to compensate for higher perceived risk.
Important Considerations
- Excludes Financing: Cap rate does not take your mortgage into account. It measures the property's performance, not your specific loan's performance.
- Operating Expenses: Be honest with your expense estimates (Property Tax, Insurance, Utilities, Repairs, Management). Underestimating expenses will artificially inflate your cap rate.
- Vacancy: Always account for periods when the unit might be empty during tenant turnover.