How the Cap Rate Calculator Works

One calculation engine produces every number on this site, from the homepage calculator to the tables on the cap rate and price pages. This page documents what it does so you can check it.

The cap rate

cap rate = net operating income / purchase price (or value)

No financing enters the calculation. Mortgage payments, down payment and interest rate are excluded by definition.

Net operating income

gross scheduled income   = (monthly rent + other monthly income) × 12
effective gross income   = gross scheduled income × (1 − vacancy %)
operating expenses       = taxes + insurance + HOA × 12 + other × 12
                         + (maintenance % + capex % + management %) × effective gross income
net operating income     = effective gross income − operating expenses

Percentage expenses are applied to collected (effective) income, not to scheduled rent. Capital reserves are treated as an operating expense, which is the conservative convention for small residential property; some commercial appraisals place them below NOI.

Value at a target cap rate

value = net operating income / (target cap rate / 100)
value gap = value − price

Rent for a target cap rate

NOI is linear in rent, so the solver is direct:

NOI needed    = price × target cap rate / 100
EGI needed    = (NOI needed + fixed expenses) / (1 − percentage expenses)
gross needed  = EGI needed / (1 − vacancy %)
rent needed   = gross needed / 12 − other monthly income

Other figures

• Expense ratio = operating expenses / effective gross income
• Gross rent multiplier = price / gross scheduled income
• Rent to price = monthly rent / price
• Value per $100 of monthly rent = 1,200 × (1 − vacancy) × (1 − percentage expenses) / target cap rate
• Value per $1,000 of annual expense = 1,000 / target cap rate

Rating bands

• Low: under 4%
• Moderate: 4% to 6%
• Solid: 6% to 8%
• High: 8% to 10%
• Very high: 10% and above
• Negative: NOI below zero

These describe where cap rates commonly fall across US residential markets. They are not a judgment of a specific deal, which should be compared with sales in its own submarket.

Assumptions on the cap rate and price pages

• Vacancy: 5% of scheduled income
• Property taxes: 1.2% of price per year. Insurance: 0.5% of price per year
• Maintenance 5%, capital reserves 5%, management 8% of collected income
• No HOA, no other income or expenses
• "Typical rent" on price pages: 0.85% of price per month, rounded to $25

Taxes and insurance vary widely by state. The homepage calculator lets you replace every assumption with a real figure.

Rounding

Rents in tables are rounded to the nearest $5 and dollar figures to the nearest dollar for display. Percentages are computed from unrounded values, so a displayed rent may reproduce a cap rate that differs by a few hundredths of a point.

Source code

The engine is a small TypeScript module with unit tests covering the income statement, the cap rate, GRM, the value and rent solvers and the sensitivity figures.