Real Estate Cap Rate Calculator
(Taxes, insurance, maintenance, management – Do not include mortgage)
Gross Potential Income:
Vacancy Loss:
Effective Gross Income:
Operating Expenses:
Net Operating Income (NOI):
Capitalization Rate (Cap Rate):
Understanding Capitalization Rate (Cap Rate)
The Capitalization Rate, commonly known as Cap Rate, is one of the most fundamental metrics in commercial and residential real estate investing. It measures the expected rate of return on an investment property, generated by the property's Net Operating Income (NOI), assuming the property was purchased entirely with cash.
This calculator helps investors quickly determine the potential profitability of a real estate asset, allowing for easy comparison between different properties regardless of how they are financed.
The Cap Rate Formula
The formula for calculating Cap Rate is straightforward but requires accurate inputs regarding income and expenses:
Cap Rate = (Net Operating Income / Current Market Value) × 100
Where:
- Net Operating Income (NOI): This is the annual revenue generated by the property minus all necessary operating expenses. NOI does not include mortgage payments (debt service), depreciation, or income taxes.
- Current Market Value: This is the present value of the property or the purchase price.
How to Use This Calculator
- Property Purchase Price: Enter the price you plan to pay for the property.
- Annual Gross Rental Income: Enter the total rent collected in a year if the property were 100% occupied.
- Vacancy Rate: Realistically, no property is occupied 100% of the time. A standard vacancy allowance is often 5% to 10%.
- Operating Expenses: Sum up annual property taxes, insurance, repairs, maintenance costs, property management fees, and utilities paid by the owner. Remember, do not include mortgage payments here.
What is a "Good" Cap Rate?
There is no single answer to what constitutes a "good" cap rate, as it varies heavily by location, property class, and the current economic environment. Generally:
- 4% – 6%: Often seen in high-demand, low-risk areas (Class A properties in major cities). These properties usually appreciate well but offer lower immediate cash flow.
- 7% – 10%: Typical for balanced investments offering reasonable risk and cash flow.
- 10%+: Often associated with higher-risk properties or depressed markets. While the return looks high, the risk of vacancy or major repairs may also be higher.
Why Cap Rate Matters for SEO and Investors
For real estate investors, calculating the Cap Rate is the first step in due diligence. It separates the operational performance of the property from the financing method. By understanding the relationship between operating expenses, vacancy, and market value, investors can make data-driven decisions rather than emotional ones.