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Real Estate Cap Rate Calculator

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Include all rent, parking, laundry fees.
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Do NOT include mortgage payments.

Enter property financial details to see Cap Rate & NOI.

Investor Pro Tip

Don't trust "Pro Forma" numbers. Always calculate Cap Rate based on *actual* trailing 12-month financials. Sellers often underestimate expenses (like vacancy and repairs) to inflate the Cap Rate.

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Cap Rate & Real Estate Resources:

Understanding Capitalization Rate

The Capitalization Rate, or Cap Rate, is the most fundamental metric in commercial and residential real estate investing. It acts as a compass, guiding investors to understand the potential return on an investment property independent of financing.

Essentially, the Cap Rate answers the question: "If I bought this property entirely with cash, what would be my annual percentage return?" This makes it an invaluable tool for comparing properties across different markets, asset classes, and price points on a level playing field.

The Cap Rate Formula

Cap Rate = (Net Operating Income / Current Market Value) × 100

Breaking Down the Components:
  • Net Operating Income (NOI): This is the total revenue the property generates (rent + fees) minus all necessary operating expenses.
    Includes Property management, taxes, insurance, repairs, vacancy.
    Excludes Mortgage payments, depreciation, capital expenditures (new roof).
  • Current Market Value: The present value of the property, or the purchase price you are negotiating.

What is a "Good" Cap Rate?

There is no single magic number. Cap rates are a measure of Sentiment and Risk. A higher cap rate implies higher return but usually comes with higher risk.

Low Cap Rate (3% - 5%)
"The Safe Bet"

Usually found in Class A properties in prime cities (NYC, LA, London). Low risk, high tenant quality, appreciation focus.

Mid Cap Rate (5% - 8%)
"Balanced"

Class B properties in growing suburbs. Good balance of cash flow and stability. Most individual investors target this range.

High Cap Rate (8% - 12%+)
"Cash Cow / Risky"

Class C/D areas or rural towns. High cash flow but higher risk of vacancy, major repairs, or declining property values.

Key Factors Influencing Cap Rates

Factor Impact on Cap Rate Reasoning
Interest Rates Increases As borrowing costs rise, investors demand higher yields to justify buying real estate over bonds.
Location Quality Decreases Prime locations are safer assets, so investors accept lower returns (lower cap rates).
Market Demand Decreases (Compression) High buyer demand drives property prices up, which mathematically pushes cap rates down.
Tenant Strength Decreases A national tenant (e.g., McDonald's) guarantees rent, lowering risk and cap rate.

Frequently Asked Questions

Cap Rate looks at the property's performance in a vacuum (unleveraged). Cash-on-Cash Return factors in your mortgage. If you have a loan with a 7% interest rate and buy a 5% cap rate property, you have "negative leverage," and your Cash-on-Cash return will be very low or negative.

No! A 12% cap rate might look amazing, but if it's in a neighborhood with high crime, zero appreciation, and tenants who don't pay rent, that "theoretical" 12% return will never materialize. High yield often masks high problems.

Cap Rate Compression happens when property prices are rising faster than rents. This effectively lowers the cap rate. It usually signals a "hot" market where investors are bidding aggressively.

A common rule of thumb is the 50% Rule: Assume 50% of gross income will go to operating expenses (taxes, insurance, repairs, management). This is a safe baseline for initial screening before digging into actual numbers.
Disclaimer

This calculator is for educational purposes only. It does not constitute financial advice. Real estate investments involve significant risks, including loss of principal. Please consult with a qualified financial advisor or real estate professional before making investment decisions.