Cap Rate Calculator – Real Estate Investment Analysis
Calculate capitalization rate for real estate investments
Table of Contents
How to Use
- Enter the annual net operating income from the property
- Enter the current market value or purchase price of the property
- Click calculate to see your cap rate percentage
- Review the interpretation to understand your investment potential
What is Cap Rate?
Capitalization rate (cap rate) is a fundamental metric used in real estate investing to evaluate the potential return on an income-producing property. It's calculated by dividing the property's net operating income (NOI) by its current market value or purchase price.
The formula is: Cap Rate = (Net Operating Income / Property Value) × 100
Interpreting Cap Rate Results
| Cap Rate Range | Interpretation | Risk Level |
|---|---|---|
| Below 4% | Lower returns, premium properties | Lower risk |
| 4% - 8% | Average market returns | Moderate risk |
| 8% - 12% | Good returns, value opportunities | Higher risk |
| Above 12% | High returns, may need improvements | Highest risk |
Generally, higher cap rates indicate higher potential returns but may also come with higher risk or property management challenges. Lower cap rates often reflect more stable, premium properties in desirable locations.
Factors Affecting Cap Rate
- Location and local market conditions
- Property type and condition
- Age of the building and required maintenance
- Economic trends and interest rates
- Supply and demand in the rental market
- Quality and stability of tenants
- Future development potential
- Local regulations and tax considerations
Limitations of Cap Rate
While cap rate is a useful metric, it has several limitations investors should be aware of:
- Doesn't account for financing costs or mortgage payments
- Ignores property appreciation or depreciation over time
- Assumes consistent income and occupancy rates
- Doesn't consider capital improvements or major repairs
- Varies significantly by market and property type
- Should be used alongside other investment metrics like cash-on-cash return and IRR
Frequently Asked Questions
- What is a good cap rate for real estate?
- A good cap rate typically ranges from 8% to 12%, though this varies by market, property type, and risk tolerance. Premium properties in desirable areas often have lower cap rates (4-6%), while value-add opportunities may offer higher cap rates (10%+).
- Does cap rate include mortgage payments?
- No, cap rate is calculated using net operating income before mortgage payments. It measures the property's ability to generate income regardless of financing. For returns after financing, consider cash-on-cash return instead.
- How often should I calculate cap rate?
- Calculate cap rate when initially evaluating a property purchase and annually to track investment performance. It's particularly useful when comparing multiple investment opportunities or assessing portfolio performance.
- Can cap rate predict future returns?
- Cap rate shows current returns based on current income and value. It doesn't predict future appreciation, rent increases, or market changes. Use it as one tool among several metrics for comprehensive investment analysis.