Cap rate calculator
This cap rate calculator turns rent and costs into a capitalization rate. Example: 60,000 yearly rent, 5% vacancy and 17,000 operating costs give 40,000 NOI; on a 500,000 value that is 8%.
Example: Solve for: Cap rate from the property value · Rental income per year 60,000 · Vacancy / lost rent (%) 5 · Operating expenses per year 17,000 · Purchase price / property value 500,000 → Result: Cap rate = 8%. Source: Wikipedia – Capitalization rate. Updated: .
How it is calculated
The capitalization rate (cap rate) relates a property’s annual net operating income to its value. It is a comparison figure for income-producing real estate, independent of how the purchase is financed.
Formulas
NOI = rental income × (1 − vacancy) − operating expenses. Cap rate = NOI ÷ property value. Rearranged, value = NOI ÷ cap rate. Interest, principal repayments, depreciation and income taxes are not part of NOI.
Example
Annual rent 60,000, vacancy 5%: effective rent 57,000. After 17,000 of operating costs, NOI is 40,000. At a price of 500,000 the cap rate is 40,000 ÷ 500,000 = 8%. In reverse, 40,000 ÷ 8% gives 500,000 again.
- The cap rate says nothing about borrowing costs or future appreciation.
- Properties are only comparable if NOI is defined the same way.
Frequently asked questions
How do you calculate the cap rate?
Divide net operating income by property value and multiply by 100. With 40,000 and 500,000 that is 8%.
What goes into net operating income?
Rental income less vacancy and operating expenses. Financing costs, depreciation and taxes are left out.
What is a good cap rate?
It depends on location, property type and the market cycle. As a rule of thumb, higher rates often come with higher risk or weaker locations; that is not a recommendation.
Sources and legal basis
- Wikipedia – Capitalization rate
- Geltner, Miller, Clayton, Eichholtz: Commercial Real Estate Analysis and Investments (Direct Capitalization)
As of: · Editorial policy
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