How do you calculate the cap rate?

Cap Rate is calculated by dividing the Net Operating Income (NOI) by the current market value (or purchase price) of the property. The formula is: Cap Rate = (NOI / Property Value) × 100.

What is a 7.5 cap rate?

A 7.5% cap rate means the property generates an annual net return of 7.5% of its value (assuming an all-cash purchase). For example, a $100,000 property with a 7.5 cap rate generates $7,500 in annual net income.

What is a good cap rate?

A 'good' cap rate varies by location and risk tolerance, but generally, 4% to 10% is considered standard. Higher cap rates (8%+) usually imply higher risk or lower-demand areas, while lower cap rates (4-5%) are common in high-demand, stable markets.

What is a 6.7 cap rate?

A 6.7% cap rate indicates a moderate return on investment. It sits between the lower returns of premium 'Class A' properties and the higher returns of riskier investments.

Cap Rate Calculator — Real Estate Investment Analysis

How the Cap Rate Calculator Works

This tool automatically calculates the Capitalization Rate by subtracting your annual operating expenses from your gross annual income to find the Net Operating Income (NOI). It then divides the NOI by the property value to determine the percentage return on the investment.

What is the Cap Rate definition?

The capitalization rate (cap rate) is a fundamental metric in real estate used to estimate the potential return on an investment property. It represents the yield of a property over a one-year time horizon, assuming the property is purchased for cash and not financed.

What is the Cap Rate Formula?

Cap Rate =
(NOI / Property Value) × 100

Where NOI = Gross Income - Expenses

How to calculate the cap rate?

Step 1: Calculate Gross Annual Income (Rent + fees).
Step 2: Account for Vacancy (subtract expected vacancy loss).
Step 3: Subtract Operating Expenses (Tax, Insurance, Maintenance, Management). Do not include mortgage payments.
Step 4: The result is your Net Operating Income (NOI).
Step 5: Divide NOI by the Purchase Price.
Step 6: Multiply by 100 to get the percentage.

Capitalization rate application: selling a property

When selling, the cap rate helps determine the asking price. If similar properties in the area are selling at a 6% cap rate, and your property generates $60,000 in NOI, you can estimate its value: $60,000 / 0.06 = $1,000,000.

How does a change in net income affect the value?

Since Value = NOI / Cap Rate, any increase in Net Operating Income (by raising rents or decreasing costs) directly increases the property value, assuming the market cap rate stays constant.

The importance of interest rates for cap rate

Cap rates and interest rates generally move together. When interest rates rise, borrowing becomes more expensive, reducing buyer purchasing power. To attract buyers, sellers effectively have to lower prices relative to income, which drives the cap rate up.

Limitations of the capitalization rate

While useful, cap rate has limitations:

It ignores financing costs (mortgage).
It assumes the property is fully occupied.
It does not account for future appreciation or tax benefits.
It looks at a single year snapshot, not long-term cash flow.