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∑Summatio

Cap Rate Calculator

Calculate gross, net, cashflow, and equity return on your investment property. Compare against savings accounts and ETFs with detailed cost and cashflow analysis.

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$
$
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Gross Yield

4.3%

Net Yield

2.6%

Cashflow Return

0.0%

Equity Return

0.2%

Monthly Cashflow

$9.67

Annual Rent
$10,800.00
Vacancy
- $324.00
Costs
- $3,360.00
= Net
$7,116.00
Property Cashflow
$116.00
Savings Account
$2,250.00
ETF
$5,250.00

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What Is the Cap Rate?

The capitalization rate is the key metric for real estate investors, measuring how invested capital is yielding returns. It goes well beyond simple rental yield by considering not just rent and purchase price but also closing costs, ongoing operating expenses, vacancy risk, and financing costs. Only this holistic view allows you to judge whether a property investment is truly worthwhile.

Four Return Metrics at a Glance

Gross yield is the simplest indicator, dividing annual rent by the purchase price. Net yield additionally accounts for closing costs and non-recoverable expenses. Cashflow return subtracts financing costs as well and shows what actually remains. Equity return measures the yield on your invested equity and benefits from the leverage effect of debt financing, which can amplify returns when loan rates are below the property yield.

The Leverage Effect

Leverage is a central concept in property investing. As long as the property yield exceeds the loan interest rate, every dollar of debt increases the equity return. With a net yield of 4 percent and loan interest of 3 percent, leverage works in your favor. However, if interest rates rise above the property yield, the effect reverses and equity returns decline. Conservative financing with adequate equity protects against this risk.

Real Estate vs. Alternative Investments

A fair comparison between property, savings accounts, and ETFs is based on the equity invested. While savings accounts are virtually risk-free, ETFs historically offer higher returns with full liquidity. Real estate benefits from leverage and potential appreciation but is illiquid and requires active management. There is also concentration risk, as all capital is tied up in a single asset. An ideal portfolio strategy combines multiple asset classes to balance risk and return across different market conditions.

Frequently Asked Questions

The capitalization rate (cap rate) measures the return on an investment property relative to the total capital invested. Unlike a simple rental yield, it factors in operating costs, vacancy risk, and financing expenses to provide a comprehensive picture of investment profitability.
Gross yield divides annual rent by the purchase price, ignoring all ancillary costs. Net yield accounts for the total investment including closing costs and deducts operating expenses such as management fees, maintenance, and vacancy allowance from rental income. Net yield is a far more meaningful metric.
The equity return (return on equity) measures the return on the actual cash you invested. Through the leverage effect of debt financing, equity returns can be significantly higher than net yields, as long as the loan interest rate stays below the property return. When rates rise above the property yield, leverage works against you.
Monthly cashflow is the difference between net rental income (after deducting vacancy and operating costs) and financing costs (interest on the loan). A positive cashflow means the property is self-sustaining and generating surplus income.
A fair comparison uses the equity invested as the baseline. If the property cashflow return exceeds the expected return on ETFs or savings accounts, real estate is more attractive from a pure yield perspective. However, risk factors such as vacancy, maintenance, illiquidity, and concentration risk must also be considered.

All calculations are for general informational purposes only. Not financial, tax, or legal advice. No guarantee of accuracy. Use at your own risk. Full disclaimer