Cap Rate Calculator
Analyze the profitability and return of a real estate investment.
Operating Expenses (Annual)
Investment Analysis
Capitalization Rate
0.00%
Net Operating Income (NOI)
$0
This is an estimate for informational purposes and does not constitute financial advice.
About the Cap Rate Calculator
The Capitalization Rate (or "Cap Rate") is one of the most important metrics for real estate investors. It measures the unleveraged rate of return on a property based on its income. This tool helps you quickly calculate the cap rate to compare the profitability of different investment opportunities.
Formula Explained
The calculator uses the standard formula for cap rate, which involves two main steps:
- Calculate Net Operating Income (NOI): We subtract all operating expenses (taxes, insurance, maintenance, etc.) from the property's gross rental income.
- Calculate Cap Rate: We then divide the NOI by the current market value or purchase price of the property.
How to Improve Your Cap Rate
A higher cap rate generally means a better return on your investment. Here are key strategies to improve it:
Increase Rental Income
Renovate units to justify higher rents, or add new income streams like paid parking or laundry facilities.
Decrease Operating Expenses
Regularly appeal property taxes, shop for better insurance rates, and invest in energy-efficient upgrades to lower utility costs.
Negotiate a Lower Purchase Price
The most direct way to get a good cap rate is to buy the property for a lower price. Strong negotiation is key.
Reduce Vacancy
Keep tenants happy to reduce turnover. A well-maintained property with responsive management attracts long-term renters.
Frequently Asked Questions
What is a good cap rate? →
A 'good' cap rate is subjective and depends on the market, property type, and investor's risk tolerance. Generally, a cap rate between 4% and 10% is considered reasonable. Higher cap rates often indicate higher risk and potentially higher returns, while lower cap rates suggest lower risk and more stable investments.
What is Net Operating Income (NOI)? →
Net Operating Income (NOI) is the total income generated by a property after subtracting all operating expenses. Operating expenses include things like property taxes, insurance, maintenance, and property management fees. NOI does not include mortgage payments (principal and interest).
How is cap rate calculated? →
The formula for cap rate is: Net Operating Income (NOI) / Current Market Value of the Property. The result is expressed as a percentage. Our calculator performs this calculation for you automatically.
Does a cap rate include mortgage payments? →
No, the cap rate calculation does not include mortgage payments (debt service). It is a measure of the property's unleveraged rate of return, which allows for an apples-to-apples comparison between properties regardless of how they are financed.
What are typical operating expenses for a rental property? →
Typical operating expenses include property taxes, property insurance, maintenance and repairs, property management fees, utilities (if not paid by tenants), vacancy loss (estimated income lost from empty units), and sometimes HOA fees. These can often amount to 40-50% of the gross rental income.