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The cap rate is a measure of the level of risk and return for investing in an asset. It represents how much income you would receive from an investment as compared to how much it costs. The cap rate calculator helps investors evaluate whether or not their investments are worth taking, based on returns versus risks.
The “simple cap rate calculator” is a free tool that can be used to calculate the capitalization rate for real estate investors. The calculator uses the current market value and the loan amount, which are entered in the form of a percentage.
A cap rate is a figure used by real estate investors to determine the value of an investment property. Based on parameters such as property valuation, gross revenue, and operating expenditures, our free cap rate calculator calculates a property’s Operating Income (Net) and cap rate. The property’s worth may then be determined by investors.
Rule of Thumb Calculator for Capitalization Rates
Here are some general cap rate guidelines for real estate investments:
- A good cap rate is often between 4% and 10% plus.
- Anything less than 4% is considered a bad cap rate.
- The cap rate time frame displays the annualized rate of return over a one-year period.
Keep in mind that cap rates vary according on the kind of property, region, and method of calculation. To correctly compare and contrast cap rates across properties, they must be in comparable areas and be of the same kind, such as a duplex or commercial property.
How to Use the Cap Rate Calculator
By dividing the Operating Income (Net) (NOI) by the The Value of Your Home and multiplying that amount by 100, the capitalization rate calculator calculates the property’s cap rate. To calculate the NOI, multiply your gross rental revenue by your Rate of Occupancy, then deduct your Rental Income Gross from your operational expenditures.
Keep in mind that the cap rate is determined over the course of a year, so all of your calculations should be done on an annual basis. If you know your monthly operating costs, divide them by 12 to find your annual operating costs. Take your gross rental revenue and multiply it by your Rate of Occupancy, then remove all of your running expenditures to get your Operating Income (Net).
All costs that assist maintain the rental property up and running are often considered rental property operational expenses by buy and hold investors. Property taxes, insurance, management fees, upkeep, repairs, and other other charges are included in these operational costs. They do not include payments on your investment property financing.
Formula for calculating the cap rate
The Formula for calculating the cap rate is NOI / The Value of Your Home x 100.
Let’s look at an example of how to compute NOI quickly. Your gross rental revenue is $60,000, with an Rate of Occupancy of 85% and operational expenditures of $15,000 per month.
$60,000 multiplied by 85% is $51,000.
$36,000 NOI = $51,000 – $15,000
Then divide the NOI by the The Value of Your Home and multiply by 100 to get your cap rate.
$9 percent cap rate = $36,000 x $400,000 = 0.09 x 100
Some investors use different variations of the Formula for calculating the cap rate, but we find it most accurate if we incorporated the Rate of Occupancy. From the above calculations, you can see just how much time the capitalization rate calculator will save you.
Inputs to the Cap Rate Calculator
Our cap rate calculator will prompt you to provide some information so that it can determine your NOI and cap rate depending on the information you provide. You’ll need to enter information such as the valuation of your property, the Rate of Occupancy, and total rental revenue, among other things. Keep in mind that cap rate is computed over a year, thus all inputs should be provided as an annual figure, with the exception of property valuation.
Inputs to the Cap Rate Calculator include:
The Value of Your Home
The Value of Your Home is the first input on our cap rate calculator. Remember that The Value of Your Home is not the same as purchase price. The Value of Your Home is the current fair market value (FMV) of the property. If you’re unsure of what your property is currently worth, you can find your current The Value of Your Home by asking a real estate agent or using the Zestimate tool on Zillow.
Rental Income Gross
Rental Income Gross should include more than just your rental income. It includes all income generated from the property. Your Rental Income Gross is usually calculated monthly so multiply that monthly number by 12 to get the yearly number. This is done because the Formula for calculating the cap rate is based on yearly numbers.
Things included in your Rental Income Gross are:
- Rent received from renters
- Parking revenue
- Laundry facilities generate revenue.
- Profits from vending
- Any extra revenue generated by the property
Rate of Occupancy
Your Rate of Occupancy is the percentage of the units in your property that are rented at any given time. A typical Rate of Occupancy is 90 to 95% or higher. The Rate of Occupancy should be used on properties with two or more units. To calculate the Rate of Occupancy, divide the number of rented units by the number of total units and multiply by 100.
Here’s an example of how to calculate Rate of Occupancy. Total units: 10, Rented units: 7
Your Rate of Occupancy would be 7 / 10 x 100 = 70%
Expenses of Operations
Expenses of Operations on an investment property are any expenses associated with that property to keep it up and running. These include things like taxes, insurance and management fees. However, they don’t include your mortgage payments.
Typical investment property Expenses of Operations include:
- Property taxes: These are assessed by a governing authority in the area the property is located and vary based on location, The Value of Your Home and size
- Rental property insurance protects your rental property against loss of income, damage, and risks such as weather-related damage; the typical coverage for a $200,000 rental property costs $1,473 to $1,596 per year.
- Property management costs range from 8% of gross monthly rent collected for an investment property to more than 25% of gross rent received for a vacation rental property.
- Maintenance and repairs: These include things to keep the property maintained like pest control, painting and lawn care as well as any necessary repairs; expect to pay about 1 percent of the The Value of Your Home per year on maintenance
- Accounting and legal costs, as well as shared area utilities, are examples of miscellaneous expenditures; it’s a good idea to set aside some additional funds for these.
When you add up all of the above expenses, you get your total Expenses of Operations. This is important because your total Expenses of Operations are needed to help you calculate your Operating Income (Net) which is part of the Formula for calculating the cap rate.
Outputs of the Cap Rate Calculator
After you have put all of your inputs into our free cap rate calculator, it will calculate the numbers for you and give you your Operating Income (Net) and your cap rate. You don’t need to worry about the calculations, but if you’re curious, we will give you the Formula for calculating the cap rate.
Formula for calculating the cap rate = NOI / The Value of Your Home x 100
Operating Income (Net)
As we mentioned above, your NOI is calculated by multiplying your Rental Income Gross by your Rate of Occupancy. Then you subtract your total Expenses of Operations from that number. You are left with your Operating Income (Net) which is one of the Outputs of the Cap Rate Calculator and a component of the Formula for calculating the cap rate.
Cap Rate
Cap rate is another output that our cap rate calculator gives you after you put in your inputs such as The Value of Your Home and Rental Income Gross. The Formula for calculating the cap rate that the cap rate calculator uses is the property’s Operating Income (Net) divided by the The Value of Your Home. That number is then multiplied by 100 and is given as a percentage. It’s used as a tool by investors for evaluating investment properties based on their value and NOI.
When Should You Use a Cap Rate to Evaluate the Potential of an Investment Property?
When analyzing commercial and residential real estate investments, a cap rate is crucial. It’s significant because it gives the investor a figure to utilize in determining if the property is a good investment and a good bargain.
Typically, a good cap rate is 4 to 10 percent or more, and it shows the ratio of the NOI to the The Value of Your Home. This means that an investor who purchases the property will be buying for a relatively low price in comparison to the property’s income production.
A cap rate is typically used for the following purposes:
“Investors utilize cap rates to figure out what a property’s rate of return is in proportion to the revenue provided by the asset. This is particularly true when comparing different assets on the market. Understanding how the NOI affects the property’s market value assists investors to determine if a property is worth the market rate being paid for it.”
— Veena Jetti, Enzo Multifamily’s Founding Partner
Using a Cap Rate as an Alternative
As we outlined above, a cap rate can be a great tool to help investors decide if a property is a good investment. The Formula for calculating the cap rate can be used by residential and commercial real estate investors. However, it’s not always a good fit, especially if you’re buying land or property that you don’t plan to rent. We recommend using the cap rate, in addition to other things such as looking at comparable properties and their price per unit.
If you’re a fix-and-flip investor, the Formula for calculating the cap rate isn’t going to be helpful to you because you’re not going to be renting out the property. Instead, you can look at what comparable properties sell for, and what the after repair value (ARV) will be. The Formula for calculating the cap rate may not be applicable if a property needs to be fixed up before it’s rented or if it has a lot of vacancies and you’re not sure what the units will rent for.
Alternative methods of valuing a property include:
- The 1 percent rule: The gross monthly rental income should be at least 1% of the purchase price; depending on the property type and location, some investors use the 2% rule; if the property’s gross monthly revenue is at least 1% of the purchase price, it’s typically cash-flow positive.
- Divide the yearly rent received by the entire property cost and multiply by 100 to get the gross rental yield; the total property cost includes the purchase price, closing charges, and any remodeling expenditures.
- Check to see whether the estimated monthly rent will cover your bills, such as your mortgage payment, taxes, insurance, utilities, and homeowners’ association fees, to determine the property’s prospective cash flow.
- Comparable homes: See what other comparative properties have sold and leased for in the last three to six months; comparables should be similar in kind, amenities, and size.
- Return on investment: A good return on investment (ROI) for a real estate investment is typically 10% or more; you can calculate your ROI on an investment property by dividing your annual return by your total cash investment; you calculate your annual return by subtracting your expenses from your total rental income; you calculate your annual return by subtracting your expenses from your total rental income.
Final Thoughts
The cap rate is a tool to help real estate investors evaluate a residential or commercial investment property. The Formula for calculating the cap rate is Operating Income (Net) divided by purchase price. Our free cap rate calculator does the calculations for you. You input a few things like the The Value of Your Home or your Rental Income Gross, and it will calculate your NOI and your cap rate.
For more what’s a good cap rate and when to use it, check out our in-depth guide on Formula for calculating the cap rate.
Check out Visio Lending if you’re searching for a high-cap-rate investment property and require financing. They’re a reputed online lender that provides quality clients with investment property loans at reasonable rates. In just a few minutes, you can become prequalified online.
Visit Visio Lending for more information.
The “how to calculate noi with cap rate” is a tool that allows users to calculate the net operating income or NOI of a property. This calculator is free and can be used for personal use.
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