Cap Rate Calculator
Calculate the capitalization rate for a real estate investment. Enter the property value and net operating income to evaluate your investment return.
Annual income minus operating expenses, before debt service
Enter the property value and net operating income, then click Calculate to see the cap rate.
How Cap Rate Works
Understanding Capitalization Rate
The capitalization rate, or cap rate, is a fundamental metric in real estate investing. It tells you the percentage return a property would generate based on its net operating income (NOI) and current market value, assuming an all-cash purchase. This calculator helps you determine the cap rate and see how different cap rates would change the implied property value.
The Cap Rate Formula
Cap rate is straightforward: divide the annual net operating income by the property value, then multiply by 100. NOI is the total rental income minus all operating expenses (property taxes, insurance, maintenance, management fees, vacancy allowance) but before mortgage payments and income taxes.
How to Interpret Cap Rate
A lower cap rate generally indicates a lower-risk, more expensive property in a desirable location. A higher cap rate suggests a higher return but potentially more risk. For example:
- Class A urban property: 3–5% cap rate
- Suburban residential: 5–7% cap rate
- Value-add or secondary market: 7–10% cap rate
Valuing Property with Cap Rate
Cap rate also works in reverse to estimate property value. If you know the NOI and the market cap rate for similar properties, you can calculate the implied value: Property Value = NOI / (Cap Rate / 100). This is how commercial real estate appraisers often determine fair market value.
For instance, a property with $50,000 NOI in a market where similar properties trade at 6% cap rates would be valued at approximately $833,333.
Limitations
Cap rate ignores financing, capital expenditures, and appreciation. Use it alongside other metrics like cash-on-cash return, internal rate of return (IRR), and debt service coverage ratio for a complete investment analysis.