Cap Rate Calculator and Analysis

Learn how to calculate cap rate with a free calculator, and strategies to use cap rate to create successful real estate investments in Australia.

Whether you’re interested in small rental property, 100+ unit apartment buildings, or commercial real estate, capitalisation rate — cap rate, for short — might be the most important metric to analyse a prospective deal.

Thousands of property investors across Australia use this cap rate calculator.

You can also use cap rate as a lens to view your current portfolio and help you determine if it makes sense to sell an asset and invest in something with a better return.

This article explains how to use cap rates to your advantage — and even contains two free cap rate calculators you can use to model deals.

The two best capitalisation rate calculators

Determine the value of a current or prospective investment property using these free cap rate calculators. Use the first calculator to find the cap rate, and use the second calculator to estimate your property valuation based on its net operating income (NOI) and cap rate.

Cap rate calculator

Analyse the capitalisation rate of an investment property with this cap rate calculator. Enter the property's purchase price, your expected gross yearly income, and your estimated annual operating expenses.

Purchase Price Gross Yearly Income Total Expenses

Net Operating Income (NOI)

$20,000

Cap Rate

8.00 %

Calculate property value using the cap rate

Determine a property's value based on its net operating income (NOI) — your annual income after subtracting expenses — and the cap rate of your choosing.

Net Operating Income

Cap Rate

Property Value

‍Important: When modelling cap rate, it’s vital that you accurately model your expenses.

It’s common for property to be listed and advertised with a high cap rate; however, once I actually run the numbers with more conservative expenses, the deal starts looking more like a money pit than a good investment opportunity.

In my experience, the most common expenses investors fail to estimate are significant, future capital expenditures — such as a new roof, new sewer, etc. — or the combination of property management and leasing fees.

What is capitalisation rate?

Capitalisation rate — or cap rate for short — is the rate of return for an investment after you subtract all operating expenses from the gross income.

Cap rate formula: Net operating income / Current property value = Cap rate

When it comes to calculating cap rate, it's important to remember that NOI (net operating income) doesn’t include any mortgage expenses.

💡 Quick tip: When I was new to real estate, it was easier for me to think about cap rate as the annual percentage of return on my initial investment if I’d purchased the property in cash, as that would remove any mortgage or interest expenses from my calculations.

Rental Property cap rate example

Let’s walk through a hypothetical example that highlights some of the risks of only using a basic cap rate formula to model a deal.

Yesterday a real estate broker I work with sent over two properties he thought I’d be interested in investing in — let’s call them Property A and Property B.

Below is a table that shows some information about the two properties.

	Property A	Property B
Purchase Price	$500,000	$500,000
Yearly Income	$60,000	$90,000
Expenses	$30,000	$40,000
Net operating income	$30,000	$50,000
Cap rate	6%	10%

Looking only at only that table, it seems clear that property B is a great deal. I should call the broker back and put in an offer, right?

Not so fast.

This table is missing a lot of important information. Before we go any further, we need to understand:

Are these numbers actuals — or estimates from the real estate agent or seller?
Where are these properties located? Is it safe?
How stable are the leases on this building? Are any of the tenants delinquent?
How old are the core systems of each building (e.g., HVAC, roof, sewer, drains, air con, kitchens, etc.)?
What are the typical cap rates in each suburb?

So I look at these questions, call up the agent again, and I get the following answers:

	Property A	Property B
Are the financials actuals or estimates?	Expenses based on trailing 12 months - income based on new lease	Expenses are an estimate, and income is based on current rent roll with $3,000 in vacancy built in ($48k gross rents)
How are the surrounding area?	B-class	C-class
How stable are the leases?	1 tenant — current on rent	This is an 8-unit apartment building with rents of $500
How is the condition of the building?	Most core systems are up to date, but the roof and HVAC will need to be replaced in the next few years	Building needs new tuckpointing, a new roof, and plumbing is 50+ years old
What are typical cap rates in the area?	6%	8%

Understanding and applying capitalisation rates can significantly influence your property investment decisions.

By delving into the nuances of each investment opportunity with a keen eye on cap rates, location, tenant stability, and property condition, you position yourself for more informed choices.

The real estate market thrives on informed analysis. Use the tools and strategies discussed to uncover true value and steer clear of potential investment pitfalls, ensuring your real estate endeavours are both profitable and sound.

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