The cap rate calculator is one of the must-use tools for anyone who’s considering investing in real estate. Find out why here.
The cap rate (short for capitalization rate) is one of the metrics that real estate investors most often use when analyzing the potential return on investment on a rental property.
So, whether you’re considering buying an investment property to turn into a rental gold mine or already own a rental property and you want to see what its financial future looks like, Mashvisor’s cap rate calculator is the tool that you want to use.
So, today I wanted to write about the cap rate metric in real estate to help beginner real estate investors start using it when they plan the future of their investment and avoid making mistakes when buying new investment properties.
What Is the Cap Rate Formula in Real Estate?
First of all, let’s start with the basics: what is the capitalization rate in real estate?
The cap rate is a metric that is used by real estate investors when analyzing a rental property’s return on investment compared to the property’s value.
This means that the cap rate formula will not take into consideration the method of financing that you’re using, but rather it would look at the value of the property as a whole.
This becomes relevant if you’re thinking about using a mortgage to pay for the property, but you’re still in the stage of considering your financing options but still want to analyze rental properties for their potential returns.
Note: If you want a metric that calculates the rate of return based on the amount of cash that you want to invest out of your pocket, the Cash on Cash Return is the metric you’re looking for, and luckily this metric is also included in Mashvisor’s Cap Rate calculator.
So, what exactly is the cap rate formula? Let’s see:
Cap Rate = (Annual Net Operating Income / Property’s Price) x 100
As you can see, the formula itself is fairly simple if you have access to this information about the property. But what exactly does the cap rate tell you about a property?
The cap rate is a percentage-based metric (hence the x100) which tells you the percentage of a property’s value that will be generated by the property as rental income on an annual basis.
For example, if a property has a cap rate of 6%, it means that the annual profit that the property is generating amounts to 6% of the property’s value at the moment of its purchase.
And while calculating the cap rate for a single property might not be a challenge, oftentimes when you want to use this metric, you will want to use it to conduct a rental market analysis.
This means that you will want to analyze tens or even hundreds of properties in a market in order to understand that market’s performance and be able to distinguish properties that are projected to perform above or below average.
Traditionally, this would be done using spreadsheets where you would input each property’s details and calculate each property’s cap rate individually before running the math on the entire document to identify the averages and the outliers…in short, it was a major hassle.
Nowadays though, all you need to do to access a cap rate real estate calculator that has all the tools and features that all real estate investors need is to use an online platform like Mashvisor.
So, what exactly sets Mashvisor’s real estate cap calculator apart from other cap rate calculators on the internet? Let’s find out.
Mashvisor’s Real Estate Cap Rate Calculator
Mashvisor is a real estate investor’s platform that was designed to help beginner real estate investors like yourself by providing them a kit of all the different tools that they will need to succeed on their real estate investment journey.
In order to talk about what it is exactly that sets Mashvisor’s real estate cap rate calculator apart, I have to mention the other tools that Mashvisor provides and how they all connect to the cap rate calculator.
Firstly, if you’re reading this blog, then you’re already using one of our most effective tools on the internet – knowledge.
Our blog has thousands of articles, beginner and advanced guides, market reports, and a plethora of knowledge about real estate that you can tap into at any time, and this knowledge is designed around our tools to guide you through using our platform efficiently and get the results that will help you succeed.
Secondly, our most popular tool on the Mashvisor platform is the best, most accessible, user-friendly, and intuitive of its kind—and that is our Investment Property Search.
This is a superbly efficient tool that anyone can use to find investment properties around the US that are for sale, and see how each property is performing and how it’s projected to perform in the future based on its current and historic rental income and the property’s value.
Basically, this shows you a map of the US where you can zoom in down to neighborhood levels and see how each market and each property is performing in terms of its cap rate and cash on cash return.
Thirdly, Mashvisor’s rental market analysis tool allows you to choose any market and quickly get a report of how rental properties in this market are performing, including rental comps that compare properties that are similar to the one you’re interested in and compare them together.
How to Use Mashvisor’s Platform
As I said earlier, Mashvisor’s tools cover all the needs that a real estate investor has when it comes to investing in rental properties.
So, to learn how to invest in real estate using Mashvisor, you’ll first need basic knowledge about real estate investing and what your strategy is going to be.
For example, there are two types of rental strategies that you can use—short-term/Airbnb rentals and long-term/traditional rentals)—and most investors prefer using one and not the other. And since Mashvisor’s tools provide data for both short-term and long-term cap rates for each property, you’ll need to know the difference between the two and what it would mean to you as the owner before picking one because it has a higher cap rate than the other.
If you do know the basics of real estate investing, however, and you already have a strategy in mind; then, it’s time for you to start using our platform and cap rate real estate calculator.
Searching for a Market
Our investment property finder tool is an easy-to-use map search tool with a simple interface that lets you narrow down your search using filters, which also includes a heat map that highlights:
- Listing price range (up to $5 million)
- Airbnb cash on cash return
- Traditional cash on cash return
- Airbnb cap rate
- Traditional cap rate
- Airbnb rental income
- Traditional rental income
- Occupancy rate
Additionally, you can use the property search tool to find investment properties in specific markets and based on specific criteria:
- Miles from location
- Rental strategy (traditional or Airbnb)
- Property type (single-family, multi-family, condo/coop…etc.)
- Number of bedrooms
- Number of bathrooms
Doing a Rental Market Analysis
Now that you have a tool that you can use to find properties and measure their potential success, it’s time to do a rental market analysis that allows you to narrow down your options to a few that you can afford and that have the potential for being profitable.
To do a rental analysis for a market you will need to first use the search tool to narrow down your search and pick all the properties that fall within your budget range and that match your basic search criteria. You can save each property that you like to your collection.
Now, you can do the same process in other markets that you potentially might invest in if you haven’t set your mind on a specific market yet.
Your next step is to determine the average cap rate that you should expect from properties within your budget range and to see what properties have a higher cap rate than the average.
Luckily, Mashvisor makes this easy in two different ways:
Firstly, when using the map feature, you can zoom out the map to any level, including a neighborhood or a city, and the tool will tell you what the average cap rate is for rental properties within this neighborhood or city for both traditional and short-term rentals.
Secondly, if you like using spreadsheets and looking at detailed numbers for each market, you can request a market report from Mashvisor and we will send you an excel sheet containing the data of all the neighborhoods and properties in that market.
Once you have a handful of properties and you’re ready to pick one, it’s time for you to jump to the cap rate formula calculator.
Using the Cap Rate Formula Calculator
This is the part where the cap rate calculator real estate analysis tool shines.
On Mashvisor, when you click on any listed property you will be taken to that property’s rental analysis page.
This page includes all the information you need to know about the property, including details about its current owner and their contact info if it was provided.
But you will also have access to the cap rate formula calculator that is fully customizable but comes pre-filled with values based on the market’s averages.
Mashvisor’s cap rate formula calculator looks like this:
As you can see, the tool includes three main features:
- The main calculator on top, which shows the results for both traditional and Airbnb rentals using the cap rate and the cash on cash return metrics, as well as the property’s occupancy rate which is also included in the calculations.
- The expenses section on the bottom, which is pre-filled based on the market’s average relevant expenses such as property and rental income taxes, HOA fees, property management, closing costs…etc. You can also adjust these values as you see fit, or add new ones if needed.
- The mortgage calculator on the right side, which includes the mortgage type, duration, amount, and interest rate.
Changing any value in the expenses or mortgage sections will instantly be reflected in the results section for both the cap rate and the cash on cash return metrics.
This page will also include other details about the long-term projections related to your investment, such as the 10-year pay-back rate or comps of other similar properties, which is especially useful at this point.
Now, all you need to do is to go to this page for each property that you have selected and modify the results to be more accurate and relevant to your specific investment, such as the mortgage amount and interest rates, at which case you’ll be using the cash on cash return value as well.
The Mashvisor cap rate calculator is the most efficient of its kind due to the several unique features and tools that Mashvisor offers which go hand in hand with our cap rate calculator tool.
If you’re interested in learning about our other tools, or perhaps you want to learn more about the advanced strategies of real estate investing; regardless of what you’re looking to learn, chances are you’ll find an article published about it on our blog!
So go check out Mashvisor’s blog and subscribe to the platform to start using it today and find the perfect investment property by tomorrow.