Cap Rate Calculator
Calculate the capitalization rate for a real estate investment based on net operating income and property value.
Understanding Cap Rate
The capitalization rate (cap rate) is one of the most commonly used metrics in real estate investing. It measures the expected rate of return on an investment property based on the net operating income it generates relative to its current market value.
Cap rate helps investors compare different properties and assess whether a deal makes financial sense. A higher cap rate generally means higher potential returns but may also indicate higher risk.
Frequently Asked Questions
How do I use this cap rate calculator?
Enter the property's gross operating income, subtract operating expenses to get the net operating income (NOI), and enter the property's current market value. The calculator divides NOI by property value to give you the cap rate as a percentage.
What information do I need to calculate cap rate?
You need three numbers: gross rental income, total operating expenses (property taxes, insurance, maintenance, management fees), and the property's market value or purchase price. Mortgage payments are not included in operating expenses.
What is a cap rate?
A cap rate is the ratio of a property's net operating income to its value, expressed as a percentage. It tells you the unlevered annual return you would earn if you bought the property with cash. It does not account for financing costs.
Why is cap rate important for investors?
Cap rate gives you a quick way to compare investment properties across different markets and price points. It standardizes returns so you can evaluate a $200,000 duplex against a $2 million apartment building on an apples-to-apples basis.
How is cap rate different from cash-on-cash return?
Cap rate ignores financing and shows the return as if you paid all cash. Cash-on-cash return considers your actual down payment and mortgage payments to show the return on the money you actually invested. Leveraged investors should look at both.
Is a higher cap rate always better?
Not necessarily. A higher cap rate means higher income relative to price, but it often signals higher risk, such as a less desirable location, older building, or higher vacancy. Lower cap rates are typical for premium, stable properties in strong markets.
What are the limitations of cap rate?
Cap rate is a snapshot metric. It does not account for future rent growth, appreciation, capital expenditures, or financing terms. Use it as one tool among several when evaluating deals. Combine it with cash-on-cash return, IRR, and market analysis for a complete picture.