Cap Rate Calculator
Calculate Capitalization Rate to evaluate investment property returns and compare opportunities.
Total acquisition cost or current market value
Total rental income collected per year
Taxes, insurance, maintenance, HOA, utilities (NOT mortgage)
Net Operating Income (NOI)
$30,000
Annual income - operating expenses
Capitalization Rate (Cap Rate)
4.00%
Typical Boston Range - Competitive for Greater Boston market. Factor in appreciation.
Understanding Cap Rate
Capitalization Rate (Cap Rate) estimates the return on a real estate investment property based on income. It's calculated as:
Cap Rate = (Net Operating Income ÷ Property Value) × 100
What Cap Rate Tells You
- Return on Investment: Higher cap rate = higher annual return relative to purchase price
- Market Comparison: Compare different properties on apples-to-apples basis
- Risk vs Reward: Higher cap rates often indicate higher perceived risk or less desirable locations
- NOT Total Return: Excludes appreciation, principal paydown, tax benefits
Boston Area Cap Rate Context
2-4%
Premium Areas: Newton, Brookline, Cambridge. Low cap but high appreciation.
4-6%
Typical Boston: Needham, Quincy, Waltham. Balanced cash flow + growth.
6%+
Value Markets: Outlying suburbs, multi-family. Higher cash-on-cash.
Limitations of Cap Rate
- Ignores Financing: Doesn't account for how you finance (cash vs mortgage)
- Excludes Appreciation: Boston properties often appreciate 3-5% annually—missing from cap rate
- No Tax Benefits: Depreciation, 1031 exchanges not factored in
- Market Timing: Cap rates compress in hot markets (prices rise faster than rents)
How to Use Cap Rate Effectively
Compare Similar Properties: Use cap rate to compare 2-family homes in Somerville vs Malden, not a single-family in Newton vs a triple-decker in Worcester.
Factor in Total Return: Low cap rate (3%) in Cambridge might outperform high cap rate (7%) in outer suburbs when appreciation is included.
Understand Market Dynamics: Boston's cap rates compressed from 6-8% (2010s) to 3-5% (2020s) due to appreciation outpacing rent growth.
Improving Your Cap Rate
- Increase Rent: Unit upgrades, market adjustments, reduce vacancy
- Decrease Expenses: Better insurance rates, challenge property taxes, efficient maintenance
- Add Income Streams: Laundry, parking, storage fees
- Buy Below Market: Distressed properties, off-market deals
Financial Disclaimer: This calculator provides educational estimates only. Cap rate is one of many investment metrics. Actual returns vary based on financing, appreciation, tax treatment, and management. Consult a qualified financial advisor or CPA for personalized investment analysis. Namaste Boston Homes is not a financial advisor.
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