Cap Rate Calculator

This calculator will determine capitalization rate of your potential investment property

How to Use the Cap Rate Calculator

You need to punch in the expenses, price, and rents in order to get the cap rate.

Be careful, each cell in the spreadsheet can be edited. If you accidentally mess it up, just refresh the page.

Use this cap rate calculator to calculate:

  • Capitalization rates on your rental property
  • Potential cash on cash return for investment property
  • Rents and expenses
  • Monthly debt payments

What Is “Cap Rate?”

The capitalization rate, also known as “cap rate”, is a method used to calculate value and estimate rate of return in commercial real estate.

Cap Rate Definition:

Capitalization rate, or just cap rate, is the ratio of Net Operating Income (NOI) to asset value. If a property sold for $100,000 and generates $8,000 of income after expenses (but before finance costs), then the cap rate would be $8,000 / $100,000 which is 8%.

Capitalization rate is used to determine the value of income producing property. There are several methods to estimate value including the gross rent multiplier, and comparative market analysis.

Though using cap rates to value property or your return on investment can be very accurate most of the time, it is still not applicable in some circumstances.

How To Calculate Cap Rates

Let’s say you are purchasing an apartment building that is selling for $1,000,000 and has an NOI of $50,000, then it would be said to have a cap rate of 5% (or 5 cap).

CAP RATE EXAMPLES

Cap rates can also be used to estimate an offer price.

If your apartment building has an NOI of $50,000 but you know the market in your area has a 7% cap rate, you can calculate an offer price.

Here it would be $50,000 / .07 = $714,285.

So, you could say the market value of this property would be $715,000 based on a 7% cap rate.

Alternately:

If cap rates are 6% in the area, you know the value is closer to $833,000.

Market Cap Rates Can difficult to calculate

Every market is broken down into different classes of property. Every class will have a different capitalization rate.

Why?

Each property carries a different risk so the investor needs to be rewarded differently based upon how much risk they are accepting.

You can’t expect a Class B apartment building to have the same cap rate as a Class C property. The C property will need a higher ROI to compensate the investors for the risk.