Cap Rate Calculator
Calculate the capitalization rate (cap rate) for real estate investments. Cap rate helps determine property value and investment returns based on net operating income.
Cap Rate Results
Property Valuation
Market Comparison
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Typical Cap Rates (2024)
Apartment Buildings: 4-7%
Office Buildings: 5-8%
Retail Properties: 6-10%
Note: Higher cap rates = higher risk/return
Understanding Capitalization Rate (Cap Rate)
The capitalization rate, or cap rate, is a key metric used in real estate investing to determine the potential return on investment for a property. It represents the rate of return an investor can expect to earn from rental income.
Cap Rate Formula
The capitalization rate is calculated as:
Cap Rate = (Net Operating Income ÷ Property Value) × 100
Where: NOI = Rental Income - Operating Expenses
What is Net Operating Income (NOI)?
NOI is the total income generated by a property after operating expenses but before debt service and income taxes. It includes rental income minus property management fees, maintenance, property taxes, insurance, and other operating costs.
How to Use Cap Rate
- Property Valuation: Estimate property value using NOI ÷ Cap Rate
- Investment Comparison: Compare returns across different properties
- Risk Assessment: Higher cap rates often indicate higher risk
- Market Analysis: Understand local real estate market conditions
- Portfolio Management: Balance risk and return across investments
Cap Rate vs. Cash-on-Cash Return
| Metric | Cap Rate | Cash-on-Cash Return |
|---|---|---|
| Focus | Property income potential | Cash flow from investment |
| Calculation | NOI ÷ Property Value | Cash Flow ÷ Cash Invested |
| Financing | Ignores leverage | Includes financing |
| Use Case | Property valuation | Cash flow analysis |
Factors Affecting Cap Rates
- Location: Prime locations command lower cap rates
- Property Type: Different property types have different norms
- Economic Conditions: Interest rates and economic growth impact rates
- Risk Level: Higher risk properties require higher cap rates
- Market Conditions: Supply and demand affect local cap rates
- Property Condition: Well-maintained properties have lower cap rates
Cap Rate Compression
Cap rate compression occurs when property values increase faster than rental income, leading to lower cap rates. This typically happens in hot real estate markets or when interest rates are low.
Target Cap Rates by Property Type
| Property Type | Typical Cap Rate Range | Risk Level |
|---|---|---|
| Class A Office | 4.0-6.0% | Low |
| Multifamily Apartments | 4.5-7.0% | Medium-Low |
| Retail Shopping Center | 6.0-9.0% | Medium |
| Industrial Warehouse | 6.5-9.5% | Medium |
| Single-Family Rental | 7.0-11.0% | Medium-High |
Limitations of Cap Rate
- Income Accuracy: NOI calculations can be subjective
- Market Changes: Cap rates change with market conditions
- Financing Ignored: Doesn't account for leverage
- Appreciation Excluded: Only considers current income
- Comparability: Different markets have different standards
Tip: Cap rate is a fundamental metric in real estate investing, but it should be used alongside other analysis tools. Always verify NOI calculations, consider local market conditions, and evaluate properties comprehensively before making investment decisions.