# Cap Rate Calculator

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.


$333 monthly gross income %$
$50 monthly operating expense %$
$269 monthly net income Your cap rate is 3.23% Use this cap rate calculator to: • Estimate the cap rate on a property you are interested in buying or selling • Understand how property value impacts the cap rate • Understand how the net operating income influences the cap rate • See if you are overpaying or underpaying for a property ## How to use the cap rate calculator 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: • Property value: Enter the value of the property you are interested in. This could real estate you are considering buying or selling. Try different values to see how the cap rate changes. • Net operating income: Our calculator lets you calculate the net operating income from gross operating income and operating expenses. Net operating income is equal to gross operating income less operating expenses. • Annual gross income: Enter the annual gross operating income on the property. • Operating expenses: In this field, enter the annual operating expenses of the property. You can enter either the dollar amount or operating expenses as a percent of annual gross income. The calculator will automatically calculate the other one for you. • Vacancy rate: Enter the vacancy rate of the property • Net operating income: When the above are all entered, the net operating income will be calculated along with the cap rate. If you know the net operating income, you can also enter just net operating income and the property value. These two values are enough to calculate the cap rate. The cap rate calculator will take these inputs and calculate the cap rate for you. ## What is cap rate? 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. ## Cap rate formula The cap rate formula is: $\textrm{Cap rate} = \frac{\textrm{Net operating income}}{\textrm{Property value}}$ Cap rates are expressed as a percentage and typically range between 5% to 10%. ## How are cap rates used? Cap rates are used in a variety of ways when looking at a property. • Real estate valuation: Cap rates are used to determine how much an income generating property might be worth. • Valuation comparisons: Cap rates can be used to compare a portfolio of real estate to see which ones are overvalues and which ones are undervalued. ## How to calculate cap rate The cap rate has two components. ### Property value 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. ### Net operating income 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: $\textrm{Net operating income} = (\textrm{Gross operating income} - \textrm{Operating expenses}) \times (1 - \textrm{Vacancy rate}$ ### Gross operating income Real estate can generate income through rent payments, parking fees, maintenance fees, and more. ### Operating expenses Operating expenses might include utility fees, janitorial expenses, property maintenance costs, property management fees, and more. ### Vacancy rate The vacancy rate is the percentage of units that are available, or are unoccupied. ### What is not included in net operating income 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. ## What does cap rate mean? ### Discount rate 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. ### Rate of return on investment 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. ## What is a good 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 typeCap rate Office6.65 - 7.80% Industrial6.13% Retail7.47% Multi-family5.11 - 5.37% Hotels7.99 - 8.55% Source: CBRE 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. ## Cap rate examples Let’s look at a few examples to understand cap rates. ### Example 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% ### Example 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

## What are the limitations of cap rates?

Cap rates are a great valuation tool for income generating real estate. However, the method has some limitations.

• Non-income generating real estate: If a piece of real estate does not generate income, such as a public park, then the cap rate formula cannot be used.
• Fix and flip: Cap rates are not great for evaluating properties that are intended to be fixed up and flipped.
• Excludes interest payments and debt: Cap rates do not take into account the use of debt to finance your purchase. Mortgages are excluded as are an interest payments.

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