The Best Cap Rate Calculator in 2020

The real estate investing business is full of metrics, and one of the most important measures for the profitability of a rental property is the capitalization rate. While cap rate might seem simple and easy to calculate, this is definitely not the case if you want to compare multiple investment properties to decide which one to buy. Thus, to stay competitive in the real estate investments business in 2020, you need a cap rate calculator. Keep reading to learn about the best one for 2020.

In this article, we will discuss:

• What Is a Cap Rate in Real Estate Investing?
• What Is the Cap Rate Formula?
• How Do You Calculate Cap Rate?
• What Is a Good Cap Rate?
• What Is a Cap Rate Calculator?
• What Does the Best Cap Rate Calculator Do for Investors?
• Where Do You Find the Best Cap Rate Calculator for 2020?
• What Are the Pros and Cons of Using a Cap Rate Calculator for Rental Properties?
• What Are Some Alternatives to the Capitalization Rate in Real Estate?

What Is a Cap Rate in Real Estate Investing?

Capitalization rate, or cap rate, is one of the most popular metrics of the rate of return on rental properties in real estate investing. Traditionally used for commercial real estate, the cap rate has established itself as a key profitability measurement for residential rentals as well.

Another way to look at the cap rate is to perceive it as a measure of the level of risk which a real estate rental property carries. After all, all investments are associated with some risk.

According to the cap rate definition, this is the ratio of the annual net operating income (NOI) of a real estate investment property to the property purchase price or the current market value. While some investors prefer to use the sale price of their rental property to calculate the return on investment, others stick to its present value in the real estate market.

What Is the Cap Rate Formula?

The capitalization rate formula is easy and straightforward:

Cap Rate = Net Operating Income (NOI)/Sale Price

where

The net operating income is the difference between the annual gross rental income which the investment property generates and the costs of owning, managing, and renting out the property. Moreover, the more sophisticated – and thus more accurate – way of calculating the NOI of a rental property also accounts for the time when the property is vacant as this bites directly into the profit which the investor makes.

Net Operating Income Formula:

NOI = Gross Rental Income – Operating Expenses – Vacancy Expenses

and

The sale price, as said above, is either the property price that the real estate investor paid initially or the current market value of the rental.

How Do You Calculate Cap Rate?

Calculating cap rate for any rental property is done by simply dividing the NOI by the current market value according to the cap rate formula. The result should be a positive number expressed as a percentage. The higher this number, the better the return on investment.

Let’s look at an example to fully comprehend how to calculate cap rate:

Cap Rate Example:

Investor A bought Rental Property 1 for $250,000, and he rents it out for $1,000 per month. Managing and operating the rental property requires $600 a month including property tax, property insurance, utilities, and everything else. Investor A is an excellent landlord, so his rental is occupied all the time, leading to a zero vacancy rate.

Let’s calculate the capitalization rate of Rental Property 1:

NOI = Annual Gross Rental Income – Annual Operating Expenses – Vacancy Expenses

where

Annual Gross Income = Monthly Rental Income x 12 = $1,000 x 12 = $12,000

Annual Operating Expenses = Monthly Operating Expenses x 12 = $600 x 12 = $7,200

Vacancy Expenses = $0

So:

NOI = $12,000 – $7,200 – $0 = $4,800

Current Market Value = $250,000

So:

Cap Rate = NOI/Current Market Value x 100% = $4,800/$250,000 x 100% = 1.92%

There we are. After a few simple mathematical calculations, we’ve come to the conclusion that the capitalization rate of Rental Property 1 equals 1.92%.

Is this a good cap rate? Is this a bad capitalization rate? Should Investor A have bought this property?

We’ll find the answers to all these real estate investing questions and many more in the following sections.

What Is a Good Cap Rate?

The majority of real estate experts agree that a good cap rate ranges between 8% and 12% for both traditional rental properties and Airbnb rentals. This is the perfect balance between the rate of return on a rental property and the level of risk which it brings.

If we look at the capitalization rate as a metric of return on investment only, then it is logical to aim for as high a value as possible. After all, investors look for the best way to make money in real estate, and the more money they make, the better.

However, we should not forget that at the same time the cap rate in real estate also measures how much risk is involved in buying and owning a certain investment property. Investors are naturally averse to risks, which implies that lower cap rates are better.

Another reason to avoid properties with excessively high cap rates is that this might be a sign of poor property management. One reason why the capitalization rate might be too big is that the investor doesn’t spend enough money on maintaining and repairing the rental, which could result in the need for major fixes in a couple of years. This could cost thousands of dollars and harm the rate of return. Do you now see how a high cap rate could indicate a high risk?

Reaching a consensus in most real estate investing matters is hard if not impossible:

• Is investing in real estate out of state or close to home better?
• Do single family homes or multi family homes make for better real estate investment properties?
• Should you invest in long term rentals or short term rentals?
• Should you look at the cap rate or the cash on cash return of a rental property?

Well, for once, real estate professionals have been able to reach an agreement that the best cap rates for rental properties are in the range 8%-12%.

Related: What Is a Good Cap Rate for Rental Properties?

What Is a Cap Rate Calculator?

The cap rate calculator is one of the must-have real estate investment tools in 2020, especially for beginner investors. This is a variety of the rental property calculator which calculates the cap rate for rental properties quickly and efficiently based on the net operating income and the property market value.

Calculating the cap rate of a single rental property that you already own is relatively easy. As a responsible real estate investor, you must keep records of your monthly rental income, recurring operating costs, and vacancy rates.

But knowing what return on investment your rental generates is not of much use, other than in deciding whether you should keep this property or try to sell your house.

However, the goal of every real estate investor should be to constantly add new properties to his/her real estate investment portfolio. Preferably you should be buying an investment property every 2-3 years to succeed in real estate. That’s where the cap rate measure becomes particularly useful and handy – in deciding which rental property to buy.

There will be over hundreds of thousands of real estate listings in the US housing market in 2020, including MLS listings, foreclosures, bank owned homes, short sales, and off market properties. What is even more overwhelming from the perspective of beginner real estate investors is that they are no longer constrained to the parameters of their location as professional long term and short term rental property management has made out of state real estate investing a feasible option. Can you imagine having to calculate the cap rate of even just a few dozens of these houses for sale to choose the best investment property to rent out traditionally or as an Airbnb property?

To say the least, this will be an extremely difficult and time-consuming process.

So what can you do alternatively?

Use the best cap rate calculator in 2020!

This is an investment property calculator that will take the property value, do a rent estimate, determine all operating expenses, and ultimately calculate the cap rate. Not for one but for hundreds of investment properties.

What Does the Best Cap Rate Calculator Do for Investors?

The best cap rate calculator in 2020 makes the life of real estate investors easier. It turns 3 months of research into 15 minutes by optimizing real estate market analysis and investment property analysis to provide reliable estimates of the cap rates of an unlimited number of rental properties for sale.

All in all, a good cap rate calculator helps investors make profitable real estate investment decisions faster and more confidently, based on big data and reliable figures.

But let’s have a look at the specific numbers and estimates which the best real estate calculator in 2020 should be able to provide:

• Property price

This one goes without saying as it is a crucially important factor for calculating cap rates.

• One-time startup costs:
  • Home inspection
  • Closing costs
  • Repair costs
  • Furniture

Even though these expenses do not factor in the cap rate formula directly, they are still an important indicator for a beginner real estate investor of whether he/she can afford buying a rental property. No matter how good of a return on investment a property might offer, if it is beyond your budget, there isn’t much you can do about it.

Let’s have a look at the way Mashvisor’s cap rate calculator shows the cost estimates for this investment property in the M Streets neighborhood the Dallas real estate market:

Mashvisor’s Cap Rate Calculator: Costs

• Recurring monthly expenses:
  • Mortgage payment
  • Property tax
  • Property insurance
  • Property management
  • Rental income taxes
  • Property maintenance
  • HOA fees (if investing in a condo)
  • Cleaning fees (if investing in a short term rental)

Most of these numbers will go into calculating the net operating income of a rental property. While some of them might be easy to figure out (such as the rental income tax rate in your real estate market), others such as property tax and property maintenance might require deeper research. With a cap rate calculator, you get all these calculations right away.

While the method of financing and the mortgage payments do not affect cap rate as they are not present in the formula, they are still very important factors for an investor. A good cap rate calculator allows a property investment buyer to adjust his/her method of financing (cash or through a mortgage loan) as well as the length and type of mortgage.

• Occupancy rate and vacancy rate

If you want to get the full picture and make the most informed, evidence-based real estate investment decision, you have to include vacancy costs into your capitalization rate calculations.

• Rental income: Traditional rental income and Airbnb rental income

Together with the operating expenses, the rental income is one of the crucial factors for calculating NOI.

• Cash flow

The cash flow is similar to the net operating income, but it also includes the monthly mortgage payments. Remember to always search for positive cash flow properties to invest in as this is the only way to make money from real estate. A negative cash flow investment property, even for just a month or two, means that you are losing money in real estate, and that’s what no investor wants.

• Cap rate: Traditional cap rate and Airbnb cap rate

Mashvisor’s Cap Rate Calculator: Traditional and Airbnb Cap Rate

Obviously, not only the best but any cap rate calculator should provide a reliable estimate of the cap rate which a rental home is expected to generate. In 2020, this number should be based on real estate comps and big data.

• Cash on cash return: Traditional cash on cash return and Airbnb cash on cash return

Although we are focusing on the cap rate as a measure of return on investment, the best cap rate calculator will also be able to supply real estate investors with cash on cash return values to make their decisions even more profitable and confident.

Furthermore, an investment property calculator needs to provide some qualitative data about the rental property such as:

• Address of the property
• Property description
• Property type (single family home, multi family home, townhouse, condo, or other)
• Lot size
• Year built
• Number of bedrooms
• Number of bathrooms
• Type of heating
• Type of cooling
• Type of listing (MLS listing, foreclosure, bank owned home, or short sale)

Mashvisor’s Cap Rate Calculator: Property Characteristics

To sum up, the best cap rate calculator in 2020 will be able to tell investors how much money they should have available in order to afford a certain home for sale. They will also figure out the best method of financing for this particular property. The cap rate real estate calculator will also show them what rate of return to expect. Last but not least, this real estate investing tool will help you choose the optimal rental strategy for each property. While some investment properties make more money when rented out on long term basis, others are more profitable as vacation rentals. It is essential to customize your rental strategy based on the property you are buying in order to maximize your profit.

Where Do You Find the Best Cap Rate Calculator for 2020?

The best cap rate calculator in 2020 is Mashvisor’s rental property calculator. It uses rental comps from actual investment properties, obtained through neighborhood analysis, as well as predictive analytics and machine-learning algorithms to calculate the cap rate of any income property in the US housing market.

Our real estate investment tool will provide you with absolutely all the must-have features which we listed above. Whether you are investing in rental properties as traditional rentals or vacation homes, you will be able to find all the real estate analysis that you need.

One of the best things about Mashvisor’s cap rate calculator 2020 is that investors are not limited to the properties for sale listed on the platform. Indeed, they can enter the information of any real estate property in the US to get readily available analytics with a few clicks of the mouse.

Where Does the Real Estate Data Come from?

Mashvisor’s cap rate calculator gets real estate data from various reliable sources including the MLS, county offices and other governmental websites, different real estate websites, and Airbnb.com. This big data is entered into our machine-learning algorithms to calculate cap rates for rental properties all across the US.

No matter how well developed and sophisticated a cap rate calculator it, it is simply useless unless it has the right data and information to evaluate.

Our investment property calculator looks at the rental rates and the occupancy rate (traditional occupancy rate and Airbnb occupancy rate) for comparable rental properties in a neighborhood to calculate the metrics by property type (single family home, multi family home, townhouse, or condo) and number of bedrooms. This neighborhood analysis is able to produce comparable rental income and the average Airbnb occupancy rate for any investment property in the area. Finally, the cap rate – as well as the cash on cash return – is calculated based on all of the factors above.

What Are the Pros and Cons of Using Cap Rate for Rental Properties?

The capitalization rate metric has many benefits, but it’s not perfect by any means. If you are a beginner real estate investor, you might be wondering about the pros and cons of using cap rate over other real estate return on investment measures. Let’s look at them:

• Advantages of the Cap Rate:
  • Easy to calculate
  • Straightforward comparison between a few rental properties
  • Used in both commercial and residential real estate investing

• Disadvantages of the Cap Rate:
  • No consideration of the method of financing: The major drawback of the capitalization rate, which forces many investors to refrain from using it, is that it doesn’t factor in the way in which the property is bought: cash or mortgage. It looks at the property price or the current market value but not at how much initial capital the investor has to put down. Furthermore, it ignores the monthly mortgage payments when calculating the net operating income. As most new real estate investors have to take a mortgage loan, relying on the cap rate metric alone might be misleading about the actual return on investment which a rental property will generate.

What Are Some Alternatives to the Capitalization Rate in Real Estate?

The most important residential real estate return on investment metrics – besides cap rate – include cash on cash return, rate of return, and internal rate of return. As each has its pros and cons, looking at all these measures is the best way to ensure a positive cash flow property with high profitability.

The fact that the capitalization rate has a disadvantage doesn’t mean that real estate investors in residential income properties should totally ignore it. What this means instead is that the cap rate should be just one of the metrics of rate of return at which they look. They should gather as much information and data as possible and perform as much investment property analysis – with the help of a rental property calculator of course – as possible before deciding which property to buy.

Now you know all that you need to know about the best cap rate calculator in 2020. What is left is to sign up for Mashvisor to start finding income properties with high return on investment in the US real estate market 2020.