Cap Rate Calculator

Worked example

Take a 12-unit building listed at $1,200,000. Each unit rents for $1,000 a month, and laundry and parking bring in another $300 a month. Gross potential income is 12 x $1,000 x 12 = $144,000 of rent plus $3,600 of other income, or $147,600 a year.

At 95% occupancy, effective gross income is $147,600 x 0.95 = $140,220. The vacancy loss is $7,380. Operating expenses at 45% of EGI come to $63,099, which leaves net operating income of $77,121.

The cap rate is $77,121 / $1,200,000 = 6.43%. The gross rent multiplier is $1,200,000 / $147,600 = 8.13x, the price per unit is $100,000 and each unit nets about $6,427 a year before debt.

What cap rate measures

Capitalization rate is net operating income divided by purchase price. It tells you what a property would return in its first year if you paid all cash. Because it leaves out the loan, it lets you compare a 4-unit and a 40-unit building, or a deal in Ohio and one in Arizona, on the same footing.

Think of it as the yield on the building itself. A 6% cap rate means every $100 of price produces about $6 a year of income after operating costs. Your actual return depends on how you finance it, which is what the cash-on-cash calculator shows.

How to calculate NOI the right way

Most cap rate mistakes come from a bad NOI. Start with gross potential income: every unit at market rent for twelve months, plus other income such as laundry, parking, storage and pet fees. Multiply that by your expected occupancy to get effective gross income. Use the occupancy you can actually sustain in that submarket, not the 100% a seller's flyer assumes.

Then subtract operating expenses. These include:

• Property taxes, reassessed at your purchase price rather than the seller's old basis
• Insurance
• Repairs and maintenance, plus turnover costs between tenants
• Property management, usually 6% to 10% of collected rent even if you plan to self-manage
• Owner-paid utilities, trash, landscaping and snow removal
• A replacement reserve for roofs, HVAC and appliances, often $250 to $400 per unit per year

Mortgage principal and interest, depreciation, income taxes and one-time capital improvements do not belong in NOI. If a listing shows a suspiciously high cap rate, check whether it left out management or reserves, or used taxes the county will raise after the sale.

Using the expense ratio

This calculator uses an expense ratio, operating expenses as a percentage of effective gross income, so you can run a quick screen before you have the seller's books. Small multifamily properties commonly run 40% to 50%. Older buildings, owner-paid heat and high-tax states push the ratio higher. Newer buildings where tenants pay their own utilities can run closer to 35%.

Once you have a trailing twelve-month operating statement, divide actual expenses by actual EGI and enter that ratio instead. If the seller's figure is far below 40%, find out what is missing before you trust the result.

What is a good cap rate?

There is no single good number. Cap rates move with interest rates and with how risky buyers think a property is. As a rough guide, newer Class A apartments in large, growing metros tend to trade at the low end of the range, while older Class C buildings in smaller or slower markets trade several points higher. A higher cap rate means more income per dollar of price, but it usually comes with more deferred maintenance, more tenant turnover or a weaker local economy.

The most useful comparison is against recent sales of similar buildings in the same submarket and against your borrowing cost. If the cap rate is below your mortgage rate, the loan costs more than the property earns, and leverage will lower your cash return instead of raising it. Our guide on what makes a good cap rate goes deeper.

Going-in cap rate versus stabilized cap rate

The going-in cap rate uses the income the property produces today. A stabilized cap rate uses the income you expect after you raise rents to market, fill vacant units or cut expenses. Value-add investors often buy at a low going-in cap rate and underwrite to a higher stabilized one. Be honest about how long that takes and what it costs. If you plan to renovate and refinance, run the numbers through the BRRRR calculator as well.

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Results are estimates for education only, not financial, tax or legal advice. Check numbers with your lender and advisors before you buy.