Cap Rate Calculator

About Cap Rate Calculator

Calculate capitalization rate for investment properties. This calculator provides instant results with step-by-step explanations to help you understand the calculation process.

How to use this calculator

1. Find the property's annual net operating income.
2. Choose the property value you want to use, such as purchase price or market value.
3. Divide net operating income by property value.
4. Multiply the result by 100 to get the cap rate as a percent.

The formula explained

• \(\text{cap rate}\) = capitalization rate, usually shown as a percentage
• \(\text{net operating income}\) = annual income after operating expenses, before mortgage payments and taxes
• \(\text{property value}\) = the purchase price or current market value of the property

Step by step method

1. Start with the property's annual income and subtract operating expenses to get net operating income.
2. Use the property's value in the denominator of the formula.
3. Divide net operating income by property value to get a decimal.
4. Convert that decimal to a percentage by multiplying by 100.

Worked example

Suppose an investor is evaluating a small rental property with a known annual net operating income and a purchase price.

1. The property produces \(\$24,000\) in annual net operating income and costs \(\$400,000\).
2. Compute \(24,000 \div 400,000 = 0.06\).
3. Convert to a percentage: \(0.06 \times 100 = 6\).

Tips and common mistakes

• Use net operating income, not gross rent, or the cap rate will be too high.
• Be consistent about property value - use purchase price or market value, but do not mix them without a reason.
• Exclude mortgage payments from operating income calculations, since cap rate is based on property performance before financing.
• A higher cap rate can mean higher return potential, but it can also signal higher risk or lower property value.

Frequently asked questions