Cap Rate Calculator
Calculate the Capitalization Rate (Cap Rate) for your real estate investment properties. Evaluate potential investments and compare property performance quickly and accurately.
Note: Enter your property data in the form below. All monetary values should be annual figures. The Cap Rate is a simple measure of a property's potential return on investment, regardless of financing.
About the Cap Rate Calculator
What is Cap Rate?
Cap Rate (Capitalization Rate) is a key metric used in real estate to evaluate the potential return on an investment property. It's calculated by dividing the property's net operating income (NOI) by its current market value or purchase price. The result is expressed as a percentage and represents the annual return on investment if the property was purchased with cash.
Why Calculate Cap Rate?
- Quickly compare different investment properties regardless of purchase price
- Evaluate the potential return on a real estate investment
- Assess the risk level of a property investment
- Determine if a property is appropriately priced in the market
- Analyze trends in property values within a specific market
- Make data-driven investment decisions
Cap Rate Formula
Cap Rate = (Net Operating Income / Property Value) × 100%
Where:
- Net Operating Income (NOI) = Effective Gross Income - Operating Expenses
- Effective Gross Income = Gross Rental Income - Vacancy Losses + Other Income
- Operating Expenses = All expenses required to run the property (excluding mortgage payments)
- Property Value = Current market value or purchase price of the property
Components of Cap Rate Calculation
Net Operating Income (NOI)
NOI represents the annual income generated by the property after deducting all operating expenses. It excludes mortgage payments, depreciation, and capital expenditures. NOI provides a clear picture of a property's earning potential regardless of financing.
Operating Expenses
These include all the costs associated with maintaining and managing the property such as property taxes, insurance, maintenance, property management fees, utilities (if not paid by tenants), and other miscellaneous expenses. Operating expenses do not include debt service (mortgage payments).
Vacancy and Credit Losses
This accounts for periods when the property may be vacant between tenants or when tenants fail to pay rent. Even in strong rental markets, it's prudent to account for some vacancy rate, typically 5-10% depending on the market.
Interpreting Cap Rates
Cap rates typically vary based on property type, location, and market conditions. Here's a general guide to interpreting cap rates:
- Low Cap Rates (3-5%): Often found in prime locations with high property values. Lower yield but potentially lower risk and better appreciation prospects. Common in major metropolitan areas and luxury properties.
- Medium Cap Rates (5-8%): Balanced investment with moderate risk and return. Typical for stabilized properties in secondary markets or good suburban locations.
- High Cap Rates (8%+): Higher potential returns but often comes with higher risk. May indicate properties in less desirable areas, properties needing significant repairs, or markets with economic challenges.
Remember that cap rates are inversely related to property values - when cap rates rise, property values typically fall, and vice versa.
Cap Rate Limitations
- Does not account for financing costs (mortgage payments)
- Ignores future appreciation or depreciation of the property
- Does not consider potential tax benefits of real estate investing
- Provides a snapshot in time rather than a long-term projection
- May not account for upcoming capital expenditures or renovations
- Doesn't reflect the time value of money or discounted cash flows
Cap Rate vs. Cash-on-Cash Return
While cap rate measures the return assuming an all-cash purchase, cash-on-cash return calculates the return based on actual cash invested (including financing). For leveraged investments, cash-on-cash return can be significantly higher than the cap rate. Investors should consider both metrics when evaluating potential investments.
Disclaimer
This calculator is for informational purposes only and should not be considered investment advice. Always consult with a qualified real estate professional or financial advisor before making investment decisions. The results provided by this calculator are based on the information you input and may not reflect all aspects of your investment situation.