Cap Rate Calculator

The capitalization rate - "cap rate" - is the single most common shorthand investors use to compare income-producing real estate. It answers one question: how much net income does this property throw off each year relative to what it costs? A $500,000 rental that nets $34,600 a year after expenses has a cap rate of about 6.9%. Plug another property's numbers into this cap rate calculator and you can line the two up on the same yardstick, no matter how each is financed.

The cap rate formula

The math is deliberately simple, which is part of why the metric is so widely used:

Net operating income (NOI) is itself a short chain of subtractions:

The key word is operating. NOI counts the costs of running the building - property tax, insurance, management, maintenance, HOA dues, owner-paid utilities - but it deliberately leaves out the mortgage, income tax and depreciation. That is what makes cap rate an unleveraged measure: it describes the asset, not your particular loan.

A worked example

Take a duplex listed at $500,000 that rents for $48,000 a year at full occupancy. Assume a 5% vacancy and credit-loss allowance ($2,400) and $14,000 of annual operating expenses. Effective gross income is $48,000 − $2,400 = $45,600. Subtract the $14,000 of expenses and NOI is $31,600. Divide by the $500,000 price and the cap rate is 6.32%. Notice the mortgage never entered the calculation - whether you pay all cash or finance 80%, the cap rate is identical.

How to use this cap rate calculator

You need just four numbers, and the tool handles the chain of subtractions for you:

1. Property value: the asking price, your offer, or a current appraised value.
2. Gross annual rental income: the full-occupancy rent for the year, before any vacancy. For a monthly rent, multiply by 12.
3. Vacancy & credit loss (%): the share of rent you expect to lose to empty units and uncollected rent. Around 5% is a common starting point, but use your local figure.
4. Operating expenses ($/yr): everything it costs to run the property in a year - tax, insurance, management, repairs, HOA, owner-paid utilities - excluding the mortgage.

Press calculate and you get the NOI, the cap rate as a prominent percentage, and supporting ratios such as the operating-expense ratio and gross rent multiplier, plus a table showing what your NOI would be worth at several market cap rates.

Who this calculator is for

• Buy-and-hold investors screening rental listings before running deeper numbers.
• First-time landlords sanity-checking whether a property's rent justifies its price.
• Sellers and agents pricing an income property using the income approach.
• Anyone comparing markets, since cap rates strip out financing and let you compare cities and asset types directly.

Key terms explained

• NOI (net operating income): annual operating income after expenses, before the mortgage and taxes. The numerator of the cap rate.
• Effective gross income: gross rent minus the vacancy and credit-loss allowance - the rent you realistically collect.
• Operating expenses: recurring costs to run the property; never includes loan principal and interest.
• Operating expense ratio: operating expenses divided by effective gross income - a quick read on how cost-heavy a property is.
• Gross rent multiplier (GRM): price divided by gross annual rent; a rough screening shortcut that ignores expenses.
• Cash-on-cash return: annual cash flow after the mortgage divided by the cash you invested - the leveraged cousin of the cap rate.

Three scenarios compared

Cap rate captures differences that headline rent hides. Compare three properties:

• Stabilized suburban rental: $400,000 price, $30,000 NOI → 7.5% cap rate. Solid, middle-of-the-road income.
• Premium urban condo: $700,000 price, $28,000 NOI → 4.0% cap rate. You pay up for a low-risk, high-demand location and accept less income per dollar.
• Older value-add property: $250,000 price, $27,500 NOI → 11.0% cap rate. More income relative to price, but the higher rate usually signals more risk or deferred maintenance.

Same metric, very different stories - which is why a cap rate only means something next to comparable local sales.

Using cap rate to value a property

The formula runs in reverse too. Rearranged, value = NOI ÷ cap rate. If similar buildings nearby trade at a 6% cap rate and your target nets $36,000, its implied value is $36,000 ÷ 0.06 = $600,000. This income approach is exactly how appraisers and seasoned buyers price income real estate, and it is why the calculator shows the implied value of your NOI across a range of market cap rates.

What moves the cap rate the most

• Price or value: the denominator - overpaying compresses the cap rate even when income is good.
• Rent level: higher achievable rent lifts NOI and the cap rate; below-market rent drags it down.
• Operating expenses: property tax, insurance and management can swing NOI by thousands; underestimating them inflates the cap rate.
• Vacancy: a realistic vacancy allowance keeps you from overstating income.
• Market and asset class: location, age and tenant quality set the cap rate investors are willing to accept.

Tips for a reliable estimate

• Use actual expenses from the seller's statements where possible, not optimistic projections.
• Budget for capital expenditures separately (roof, HVAC, appliances); they are not operating expenses but they still cost real money.
• Confirm who pays utilities - owner-paid utilities belong in operating expenses and can meaningfully lower NOI.
• Anchor your result to recent comparable sales; a cap rate without a local benchmark is just a number.

Limitations and assumptions

Cap rate is a screening tool, not a complete return analysis. Keep these limits in mind:

• It ignores financing entirely, so it does not reflect your actual cash flow after a mortgage.
• It ignores appreciation, rent growth and tax benefits such as depreciation - all part of total return.
• It is a snapshot: it reflects today's income and value, not future performance.
• It is only as good as your inputs - garbage rent or expense figures produce a misleading rate.
• It does not include capital expenditures or one-time costs, which can erode real returns.

Building NOI line by line

Because the cap rate is only as trustworthy as the NOI behind it, it pays to understand exactly what goes into that number. NOI starts at the top with gross scheduled rent - the rent every unit would produce at full occupancy and full collection - and works downward through a short, disciplined stack:

• Gross scheduled rent: all rental income at 100% occupancy, plus any reliable "other income" such as parking, laundry, storage or pet fees.
• Less vacancy & credit loss: a realistic allowance (often 4-8%) for empty units and rent that is never collected. Subtracting this gives effective gross income (EGI).
• Less operating expenses: property tax, insurance, property management, repairs and maintenance, HOA dues, owner-paid utilities, landscaping, pest control and routine turnover costs.
• Equals NOI: what the property earns from operations before any debt service, income tax, depreciation or capital expenditures.

Two rules trip up newcomers. First, the mortgage is never an operating expense - debt service sits below NOI, which is why two buyers financing the same building differently still compute the same cap rate. Second, capital expenditures (a new roof, furnace or full unit renovation) are not operating expenses either; they are large, lumpy and budgeted separately, even though they very much affect your real returns. Get this stack right and the cap rate becomes a clean, comparable number; get it wrong and you are comparing apples to oranges.

Cap rate vs. cash-on-cash return vs. ROI

Cap rate is one of three return measures investors quote, and confusing them is a classic mistake. Each answers a different question:

• Cap rate = NOI ÷ property value. It describes the asset and ignores your loan entirely, which is why it is the right tool for comparing properties.
• Cash-on-cash return = annual pre-tax cash flow (after the mortgage) ÷ the cash you actually invested (down payment plus closing costs). It describes your deal with your specific financing.
• ROI = total return (cash flow plus appreciation plus loan paydown, sometimes minus selling costs) over your full holding period. It describes the whole investment from purchase to sale.

Here is the link between the first two. Suppose a property has a 6% cap rate and you borrow at a 5% mortgage rate. Because your income yield (6%) exceeds your borrowing cost (5%), leverage is "positive" - financing pushes your cash-on-cash return above the cap rate. Borrow at 7% on that same 6% asset and leverage turns "negative," dragging cash-on-cash below the cap rate. This is the single biggest reason the same building can look like a great deal to one buyer and a poor one to another. Use the cap rate to judge the property, then run the financing through the Rental Property Calculator to see your actual cash-on-cash and ROI.

What sets market cap rates

The cap rate you should expect is not a number you choose - it is set by the market, and a few forces move it:

• Interest rates: when borrowing costs rise, buyers demand higher cap rates (lower prices) to make deals pencil, so cap rates broadly track the 10-year Treasury yield over time.
• Perceived risk: older buildings, weaker submarkets, single-tenant exposure and deferred maintenance all push the required cap rate up; stable, newer, well-located assets command lower ones.
• Growth expectations: markets where investors expect strong rent growth accept lower cap rates today because they are pricing in tomorrow's higher NOI.
• Liquidity and demand: when capital floods into real estate, competition bids prices up and cap rates down; when buyers retreat, cap rates expand.

The gap between a property's cap rate and the "risk-free" Treasury yield is the cap rate spread - effectively the extra return investors require for taking on real-estate risk. A thin spread can be a warning that prices have outrun fundamentals; a wide one can signal opportunity, or hidden risk worth investigating.

Typical cap rates by property type

There is no universal "good" cap rate, but different asset classes tend to cluster in recognizable ranges because they carry different risk and management intensity. The figures below are broad, illustrative ranges - always confirm against recent local sales:

• Class A multifamily / new urban rentals: often the lowest cap rates (roughly 4-5.5%), reflecting strong demand, low vacancy and easier management.
• Class B/C apartments and single-family rentals: a middle band (about 5.5-8%), trading more income for more management and tenant turnover.
• Older or value-add residential: higher cap rates (8-10%+), pricing in repairs, vacancy risk and weaker locations.
• Commercial (retail, office, industrial): a wide range driven by lease terms and tenant credit; long leases to strong tenants compress the cap rate, short or risky leases widen it.

The takeaway is the same one that runs through this whole page: a cap rate is meaningful only next to comparable sales of the same asset type in the same market, never against a national average.

A second worked example: small multifamily

Consider a four-unit building priced at $600,000. Each unit rents for $1,400/month, so gross scheduled rent is 4 × $1,400 × 12 = $67,200 a year. Apply a 7% vacancy and credit-loss allowance ($4,704) and effective gross income is $62,496. Operating expenses run $24,000 (property tax $9,000, insurance $3,500, management at 8% of EGI ≈ $5,000, repairs and maintenance $5,000, owner-paid water/trash $1,500). NOI is $62,496 − $24,000 = $38,496, giving a cap rate of $38,496 ÷ $600,000 = 6.42%. The operating-expense ratio is $24,000 ÷ $62,496 = 38%, comfortably inside the typical 35-45% band for stabilized residential. Now flip it: if comparable four-plexes in that submarket trade at a 5.75% cap rate, the income approach implies a value of $38,496 ÷ 0.0575 ≈ $669,000 - a hint that, on these numbers, the asking price may leave room.

How investors actually use the cap rate

In practice the cap rate does three jobs. As a screening filter, it lets an investor reject obviously over- or under-priced listings in seconds before building a full model. As a valuation tool, the rearranged formula (value = NOI ÷ cap rate) turns a verified NOI into an offer price using the cap rate buyers are paying for similar assets nearby. And as a benchmark, it lets you compare a duplex in one city against an apartment building in another on the same income-yield basis, stripping out the noise of different loans. What the cap rate cannot do is tell you your take-home cash flow or total return - for those you layer financing and a holding period on top, which is exactly where cash-on-cash return and the ROI Calculator come in. Seasoned buyers treat the cap rate as the opening question of underwriting, not the final answer.

How it compares to related calculators

Cap rate answers "how much income does this asset produce per dollar of value?" Other questions call for sister tools:

• For a full rental analysis with financing, cash flow and cash-on-cash return, use the Rental Property Calculator.
• To pin down the property-tax line of your operating expenses, use the Property Tax Calculator.
• To measure overall return on money in and money out, use the ROI Calculator.
• To project growth of money you invest, use the Investment Calculator.
• To see how an annual growth rate compounds over years, use the CAGR Calculator.
• To grow a lump sum or contributions over time, use the Future Value Calculator and Compound Interest Calculator.

Sources & further reading

• Internal Revenue Service (IRS) - Publication 527: Residential Rental Property (rental income, deductible operating expenses, depreciation and capital improvements).
• Consumer Financial Protection Bureau (CFPB) - Owning a Home: financing and the cost of property ownership.
• The Appraisal Foundation - the income approach to value (NOI capitalized at a market-derived rate) used in professional real-estate appraisal.