Cap Rate Calculator
Calculate the Capitalization Rate (Cap Rate) of a commercial or residential real estate property based on its Net Operating Income (NOI) and current market value.
Calculation Results
The capitalization rate expressing the expected annual yield on a cash purchase.
How This Calculator Works
To determine the capitalization rate:
- Enter the purchase price or current market value of the property.
- Enter the annual Net Operating Income (NOI) of the property (Annual revenue minus annual operational expenses).
The calculator displays the cap rate. This allows investors to quickly compare the profitability of different properties in a market.
Formula & Calculations
The capitalization rate (cap rate) is calculated as Net Operating Income divided by the property value (or purchase price), expressed as a percentage:
Cap Rate = (Net Operating Income / Property Value) × 100
Where Net Operating Income (NOI) is the annual rental income minus all operating expenses (taxes, insurance, management, repairs, utilities), excluding mortgage payments.
Step-by-Step Calculation Examples
Commercial Multi-Family Deal
Calculating the cap rate for an apartment building valued at $500,000 generating $35,000 in net operating income annually.
- property_value: 500000
- noi: 35000
- cap_rate: 7.00%
Frequently Asked Questions
What is a good capitalization rate?
A "good" cap rate depends on the asset class and location. Higher cap rates (8% to 10%+) indicate higher potential returns but also higher risk (e.g., secondary markets, older buildings). Lower cap rates (4% to 6%) are common in low-risk, high-demand areas like city centers.
Why does Cap Rate exclude mortgage payments?
Cap rate measures the property’s intrinsic performance independent of how it is financed. Since different buyers use different financing terms (cash, 20% down, 50% down), excluding debt service allows for direct apples-to-apples comparisons of the property asset itself.
How do you calculate Net Operating Income (NOI)?
NOI = (Gross Rental Income + other income like parking/laundry) - (Property Taxes + Insurance + Maintenance + Property Management Fees + Utilities + Vacancy reserves). Do not subtract mortgage payments or depreciation.