How to Calculate CAP

CAP stands for capitalization and is frequently calculated to determine a return rate from an investment. CAP rates are typically evaluated for a real estate property using the formula: CAP rate = Annual net operating income (NOI)/property price. Net operating income (NOI) is the gross income (before taxes) minus operating costs (e.g. repair costs, property taxes).

Things You'll Need

• Calculator

Instructions

1. Obtain the current market price of the building or an apartment complex. For example, property price is $550,000.

2. Estimate the gross annual lease income. For instance, the gross income is $115,000.

3. Add up all costs resulting from property operations in one year. Operating costs may include property taxes, insurance, maintenance and repairing, supplies and utilities. Note that income or capital gain taxes must not be included here. For example, operating costs are $35,000.

4. Subtract operating expanses (Step 3) from the gross income (Step 2) to calculate NOI. In our example, the NOI equals $115,000 minus $35,000, or $80,000.

5. Divide the NOI value (Step 4) by property price (Step 1) to calculate the CAP rate. In our example, the CAP rate is $80,000/$555,000, or 0.1455.

6. Multiply CAP from Step 5 by 100 percent to get CAP in percentages.
   In our example, the CAP rate (in percent ) is 0.1455 x 100 percent = 14.55 percent.

Resources

• Cap Rate