Cap Rate Calculator
Measure the unleveraged rate of return on an investment property.
How This Tool Works
Cap Rate (Capitalization Rate) is the universal language of commercial real estate. It measures a property's natural rate of return for a single year without considering debt. It allows you to fairly compare an apartment building in Texas with an office park in New York.
The Formula
- NOI: Total annual income minus all operating expenses (but NOT mortgage payments).
- Asset Value: The current market price or purchase price.
Example Scenario
A property costs $1,000,000.
- It generates $100,000 in rent per year.
- Expenses (taxes, insurance, maintenance) are $40,000/year.
- NOI: $60,000.
- Cap Rate: $60,000 / $1,000,000 = 6.0%.
Frequently Asked Questions
Does Cap Rate include mortgage payments?
No. Cap Rate assumes an all-cash purchase. It gauges the profitability of the asset itself, regardless of how you finance it. To include mortgage payments, use a Cash-on-Cash Return or Cash Flow calculator.
What is a good Cap Rate?
A 'good' Cap Rate typically matches or exceeds the current interest rate for borrowing, ensuring you have positive leverage. Historically, 4% to 10% is common, with lower Cap Rates in prime, low-risk areas (like NYC or LA) and higher Cap Rates in riskier or rural markets.
Why do investors buy low Cap Rate properties?
Investors often accept a lower Cap Rate (e.g., 4%) for 'trophy' assets or properties in high-demand areas where they expect significant appreciation (value growth) over time, which compensates for the lower immediate cash flow.