Cap Rate Calculator

What is cap rate?

Capitalization rate, or cap rate, is a property's net operating income (NOI) divided by its purchase price (or current market value). It estimates the yearly return from the property itself as if you paid cash, which is why it ignores mortgages entirely and is the standard way to compare one rental property with another. The formula: cap rate = NOI ÷ price. NOI is rent collected (after vacancy) minus operating costs such as property tax, insurance, maintenance and management, but not mortgage payments, depreciation or income tax. For the version of the numbers that includes your loan, use the rental property ROI calculator or the cash-on-cash return calculator.

Worked example with the default inputs

• Price $250,000; rent $2,000/month, so potential rent is $24,000 a year.
• Less 5% vacancy ($1,200), rent collected is $22,800.
• Operating costs: property tax $3,000 + insurance $1,200 + maintenance, management and other $3,000 = $7,200.
• NOI = $22,800 − $7,200 = $15,600.
• Cap rate = $15,600 ÷ $250,000 = 6.24%.
• Expense ratio = $7,200 ÷ $22,800 = 31.58%. Gross rent multiplier = $250,000 ÷ $24,000 = 10.42.

The "implied value" line works the formula backwards: if comparable properties in the area trade at a 6% cap rate, this NOI would suggest a value of about $260,000, which is $10,000 above the asking price in this example. Cap-rate valuation is only as good as the NOI and the comparable cap rate you feed it.

What is a good cap rate?

A "good" cap rate depends on location, property type, condition and risk. As general reference points only: lower cap rates (often cited as roughly 3–5%) tend to show up in expensive, high-demand markets where buyers accept lower yields for stability or appreciation potential, while higher cap rates (often 7–10% or more) are more common in cheaper or higher-risk markets. A higher cap rate is not automatically better, since it may reflect more vacancy, repairs or neighborhood risk. Compare like with like, and check the numbers behind each cap rate, because sellers' quoted NOIs often leave out costs such as management, reserves or vacancy.

Cap rate vs cash-on-cash return

Cap rate ignores how you pay for the property. Cash-on-cash return starts from the same NOI, subtracts the mortgage, and divides by the cash you invested. A property with a 6.24% cap rate can produce a much lower or higher cash-on-cash return depending on the loan rate and down payment. If the borrowing rate is higher than the cap rate, leverage tends to hurt cash flow; if it is lower, leverage tends to help. Use both numbers together.

Common cap rate mistakes

• Leaving out vacancy and reserves. Real properties are not 100% occupied and roofs eventually need replacing.
• Including the mortgage. Debt payments are not part of NOI.
• Using the seller's numbers. Verify rent and expenses, and re-check property tax, which can change after a sale.
• Using purchase price after a big rehab. If you will spend heavily on repairs, compare against your all-in cost as well.