Calculator Panel
Calculation Ready
Enter your values above and click Calculate.
What This Calculator Does
This calculator computes the unleveraged rate of return of a rental property, allowing investors to evaluate deal profitability independently of financing structures.
How to Use This Calculator
Enter the purchase price, gross annual rental income, and annual operating expenses, then click Calculate.
How the Calculation Works
The underlying math engine processes your inputs using exact formulas. This systematic approach ensures professional, institutional-grade calculation precision:
Mathematical Formula
Formula Legend:
- · Gross Annual Income = Gross rental income potential.
- · Annual Operating Expenses = Taxes, insurance, management, maintenance, utilities (excludes mortgage).
- · Purchase Price = Purchase price or estimated property valuation.
Practical Example
Suppose you buy a property for $400,000, expect gross annual rent of $48,000, and pay $16,800 in annual operating expenses (taxes, insurance, repairs, management):
Step-by-Step Mathematical Walkthrough:
- 1 Calculate Net Operating Income (NOI): $48,000 - $16,800 = $31,200.
- 2 Calculate the Capitalization Rate: ($31,200 / $400,000) * 100 = 7.80%.
- 3 If you were to buy this property entirely in cash, you would receive an annual unleveraged yield of 7.80% on your investment.
Important Assumptions & Notes
- All annual operating expenses are fully captured (excluding mortgage interest).
- The Cap Rate represents a cash-purchase yield.
Common Mistakes or Considerations
- Using Cap Rate to evaluate deals without looking at the local market (a high Cap Rate often indicates a higher-risk neighborhood with low appreciation potential).
Frequently Asked Questions
What is a good Cap Rate for a rental property?
Generally, a Cap Rate between 5% and 8% is considered healthy. However, 'good' is subjective: lower Cap Rates (4% to 5%) occur in high-demand, low-risk areas (like coastal cities) while higher Cap Rates (8% to 10%+) occur in higher-risk, slower-growth areas.
Why does Cap Rate ignore my mortgage?
Because financing terms are highly personal (dependent on your credit score, down payment, and lender). Ignoring the mortgage isolates the property's actual intrinsic earning power, allowing you to compare deals objectively.