Cap Rate Calculator
Calculate the capitalization rate for investment properties. Analyze NOI, estimate property values, and compare multiple investments to find the best opportunities.
Cap Rate Calculator
Calculate capitalization rate and analyze real estate investment returns
Property Details
Monthly rent: $4,000
Annual Operating Expenses
Cap Rate Analysis
Key Metrics
Expense Breakdown
What is Cap Rate?
The capitalization rate (cap rate) is one of the most important metrics in real estate investing. It measures the rate of return on a property based on its net operating income (NOI) relative to its purchase price or current market value.
Cap Rate Formula
For example, a property worth $500,000 with $40,000 NOI has a cap rate of 8%
Understanding Net Operating Income (NOI)
NOI Includes
Income and expenses directly related to property operations.
- + Gross Rental Income
- + Other income (parking, laundry, etc.)
- - Vacancy losses
- - Property management fees
- - Insurance premiums
- - Property taxes
- - Maintenance & repairs
- - Utilities (if owner-paid)
NOI Excludes
Financing costs and capital expenditures.
- Mortgage payments (principal & interest)
- Capital expenditures
- Depreciation
- Income taxes
- One-time repairs or improvements
Note: NOI is calculated before financing to allow comparison between properties regardless of how they are financed.
Cap Rate Ranges by Property Type
Cap rates vary significantly based on property type, location, and market conditions:
| Property Type | Typical Cap Rate | Risk Level | Characteristics |
|---|---|---|---|
| Class A Multifamily | 4-5% | Low | Prime locations, new builds |
| Class B Multifamily | 5-7% | Moderate | Good areas, some updates needed |
| Class C Multifamily | 7-10% | Higher | Older properties, B/C locations |
| Single Family Rentals | 5-8% | Moderate | Market dependent, appreciation focus |
| Retail | 6-9% | Higher | Tenant dependent, lease terms vary |
| Office | 6-8% | Higher | Long leases, market shifts |
| Industrial | 5-7% | Moderate | Strong demand, triple net common |
Note: These are general ranges and vary by market. Always research local cap rates.
What is a Good Cap Rate?
Lower Risk / Core Markets
Properties in prime locations with stable tenants. Lower returns but more predictable income and better appreciation potential.
Moderate Risk / Value-Add
Good balance of cash flow and appreciation. Often properties that need some improvements to maximize value.
Higher Risk / Opportunistic
Higher returns come with higher risk. May indicate distressed property, challenging location, or significant management needs.
Remember: A high cap rate is not always better. It often indicates higher risk. The best cap rate depends on your investment goals, risk tolerance, and local market conditions.
Cap Rate vs Other Investment Metrics
Cap Rate vs Cash-on-Cash Return
Measures unlevered return (without financing). Good for comparing properties regardless of financing terms.
Measures actual cash return on your invested capital. Accounts for mortgage payments and shows true yield on your down payment.
Cap Rate vs GRM
Uses Net Operating Income (after expenses). More accurate but requires detailed expense data.
Uses gross rent only (Price / Annual Rent). Quick comparison metric but does not account for expenses.
How to Use Cap Rate in Your Analysis
1. Compare Similar Properties
Use cap rate to compare properties of the same type in the same market. A higher cap rate may indicate better value or higher risk.
2. Estimate Property Value
If you know market cap rates and the NOI, you can estimate property value: Property Value = NOI / Cap Rate
3. Set Purchase Price Targets
Determine your minimum acceptable cap rate, then calculate the maximum price you should pay based on the property NOI.
4. Analyze Market Trends
Track cap rate trends in your target market. Compressing cap rates indicate increasing prices; expanding cap rates suggest declining values.
Frequently Asked Questions
Why is cap rate important for real estate investing?
Cap rate provides a standardized way to compare the income potential of different properties regardless of financing. It helps investors quickly assess whether a property meets their return requirements and compare opportunities across different markets.
Does cap rate include mortgage payments?
No, cap rate is calculated using Net Operating Income before debt service. This makes it useful for comparing properties regardless of how they are financed. To account for financing, use Cash-on-Cash Return instead.
Why do cap rates vary by location?
Cap rates reflect risk and growth potential. Prime markets like coastal cities have lower cap rates because investors accept lower yields for stability and appreciation. Secondary markets offer higher cap rates to compensate for perceived higher risk or slower growth.
Can cap rate be used for house flipping?
Cap rate is primarily used for income-producing properties held for rental income. For house flipping, metrics like ARV (After Repair Value) and profit margin are more relevant since there is no ongoing rental income.
What is cap rate compression?
Cap rate compression occurs when cap rates decrease over time, typically because property values are rising faster than rents. This means investors are accepting lower returns, often due to high demand or expectations of future rent growth and appreciation.