Estimate the cap rate on your real estate property with this simple cap rate calculator and see how the property value and net operating income impact the cap rate.
Use this cap rate calculator to:
Our simple cap rate calculator calculates the cap rate based on two primary inputs: property value and net operating income. It also allows you to calculate the net operating income from the gross operating income and the annual operating expenses.
Here are the inputs to our calculator:
The cap rate calculator will take these inputs and calculate the cap rate for you.
Cap rate, or capitalization rate, is a real estate valuation tool to understand if a property is being overvalued, undervalued, or fairly valued. It helps answer the question: What is the fair value of this property?
When you know the cap rate, you have a better sense if you are getting a good deal or a bad deal on a real estate transaction.
The cap rate method is used to value income-generating properties, such as residential rentals or commercial real estate.
The cap rate formula is:
Cap rates are expressed as a percentage and typically range between 5% to 10%.
Cap rates are used in a variety of ways when looking at a property.
The cap rate has two components.
This is the typically the price that the property can be purchased for. You can get this price from the seller. Or this might be the price you are considering selling a piece of property for.
The cap rate method is used only for income generating properties. Net operating income, or NOL, is a property’s revenue less all operating expenses. It does not include interest on debt, taxes, capital expenditure, amortization, or depreciation.
The net operating income formula is:
Real estate can generate income through rent payments, parking fees, maintenance fees, and more.
Operating expenses might include utility fees, janitorial expenses, property maintenance costs, property management fees, and more.
The vacancy rate is the percentage of units that are available, or are unoccupied.
Net operating income does not include taxes, interest, capital expenditure, depreciation or amortization. It only includes income and expenses related to the operations of the property.
The cap rate assumes that the property will earn its current net operating income forever. Given this net operating income, what is the discount rate such that the present value of the property is equal to its current property value? This is the cap rate.
You can also interpret the cap rate as the rate of return on the property. Given that a property is worth a certain amount, what return do you receive on it each year? The return is the cap rate.
The cap rate in isolation can be hard to interpret. What does it mean? Is this cap rate high or low? It’s important to understand the cap rate in context and compare it with cap rates of real estate of the same type, tier, and geography.
|Property type||Cap rate|
|Office||6.65 - 7.80%|
|Multi-family||5.11 - 5.37%|
|Hotels||7.99 - 8.55%|
Cap rates also rise and fall with general interest rates. In a low interest environment, cap rates will be lower, and in a high interest environment, cap rates will generally be higher.
Let’s look at a few examples to understand cap rates.
A property has an NOI of $50,000. If you buy it for $400,000, what cap rate will you be purchasing it at?
Cap rate = NOI / Property value = $50,000 / $400,000 = 12.5%
The average cap rate for single family rentals in your beach town is 8%. You own a rental home that has an NOI of \$42,000. What is a reasonable estimate of your home’s value?
Cap rate = NOI / Property value
We can rewrite this formula as:
Property value = NOI / Cap rate = $42,000 / 8% = $525,000
Cap rates are a great valuation tool for income generating real estate. However, the method has some limitations.