Cap Rate Calculator
Evaluate real estate investments with our free cap rate calculator. Enter the property value, annual income, expenses, and vacancy rate to calculate Net Operating Income, capitalization rate, gross rent multiplier, and cash-on-cash return.
The capitalization rate (cap rate) is the most widely used metric for evaluating the return potential of income-producing real estate. The formula is: Cap Rate = Net Operating Income (NOI) / Property Value. NOI is calculated as gross rental income minus vacancy losses and operating expenses (but before mortgage payments, depreciation, and income taxes).
Cap rates vary significantly by property type, location, and market conditions. Class A properties in major cities might trade at 3-5% cap rates (lower return but lower risk), while Class C properties in secondary markets might offer 8-12% cap rates (higher return, higher risk). A 'good' cap rate depends on the investor's risk tolerance and alternative investments. As a general rule, the cap rate should exceed the risk-free rate (Treasury yields) by a meaningful margin.
The Gross Rent Multiplier (GRM = Property Value / Annual Gross Income) is a simpler metric that ignores expenses but provides a quick comparison tool. A lower GRM suggests better value. Cash-on-cash return (NOI / Cash Invested) measures the return on actual cash invested, accounting for leverage, and is useful for comparing investments with different financing structures.