Capitalization Rate Calculator

The capitalization (cap) rate of a building measures its rate of return based on the value of the building and the income stream that it generates. Cap rates are calculated using the following formula:

value = annual income/ cap rate

The calculator on this page can be used to calculate the current cap rate for a property.

Monthly Rent Enter the total monthly rent you receive
Gross Annual Income Calculated as monthly rent * 12
Other Income Enter the annual amount of any other income (e.g. Laundry)
Total Gross Calculated as the annual rent plus other income.
Vacancy % Estimate a value for expected vacancies (5% is typical)
Amortized Costs Estimate an annual amortized value for repairs and capital improvements (e.g. a $10,000 roof amortized over 10 years = $1,000)
Maintenance Enter the amount spent on routine maintenance this year.
Utilities Enter the amount spent on utilities this year.
Property Taxes Enter the annual property tax amount for the building.
Insurance Enter the annual property insurance premium.
Management Fees Enter the cost of management fees
Net Operating Income Calculated as the annual gross income minus expenses
Market Value Enter the current market value and leave the CAP Rate blank to calculate the CAP Rate
CAP Rate Enter a CAP Rate and leave the purchase price blank to calulate the property value
   

What Cap Rate Should I Use to Value a Property?

Cap rates can be used to calculate the value of commercial and other income producing properties. Compare the cap rate for a candidate property with the cap rates for comparable properties to determine its value. Look for properties that have the same use (e.g. Multi-Family, Office or Industrial) and and class. Commercial buildings are usually classified as A, B, C or D properties where A = good and D = poor. Market conditions also influence cap rates. For example, cap rates in New York City are lower than cap rates in Orlando because land is scarce in NYC. The following table shows typical cap rates for Florida multi-family properties in late 2009.

Class Property and Tenant Profile Cap Rate
A Less than 10 years old, white collar workers in a good area with strong demographics 7.5 and below
B Less than 20 years old, mixture of white and blue collar workers decent neighborhood 7.5 to 8.25
C Around 30 years old in decent condition, blue collar and Section 8 in an OK neighborhood 9 to 10
D Over 40 years old with deferred maintenance, Section 8 and unemployed tenants in a rough area Over 12