Real Estate & Investing
Cap Rate Calculator
Capitalization rate compares a property's net operating income with its value, giving an unleveraged yield you can use to compare deals.
Calculation inputs
Use annual figures and exclude mortgage payments from expenses.
Results
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Complete the fields and select Calculate to show results here.
About this calculator
A capitalization rate expresses a property's annual net operating income as a percentage of its value, giving an unleveraged yield that lets you compare properties of different sizes and prices on one scale. Investors, appraisers, and lenders use it as an early check on whether an asking price lines up with the income a property actually produces.
How the calculation works
- NOI = annual gross rental income − annual operating expenses
- Cap rate % = (NOI ÷ property value) × 100
Notes and assumptions
Cap rate deliberately ignores financing, so two buyers with different loans can compare the same property on equal terms.
Operating expenses should include taxes, insurance, management, repairs, and a vacancy allowance.
How it works in plain English
The calculator starts with net operating income (NOI), which is annual gross rental income minus annual operating expenses such as taxes, insurance, management, and maintenance. Mortgage principal and interest are deliberately excluded, because cap rate is meant to measure the property's own performance, not the financing behind it.
Dividing NOI by the property's value produces the cap rate as a percentage. A higher cap rate means more income relative to price, which can point to a bargain or to added risk from location, tenant quality, or building condition. A lower cap rate usually means the market views the property as lower risk or higher demand, so buyers accept less income per dollar spent.
The tool also reports monthly NOI and the expense ratio, which is expenses as a share of gross income, to help gauge how efficiently the property is being run.
The formula
- NOI = annual gross rental income - annual operating expenses
- Cap rate % = (NOI / property value) x 100
Worked example
A property is valued at $350,000, brings in $42,000 in annual gross rent, and has $15,000 in annual operating expenses covering taxes, insurance, and management. NOI is $42,000 minus $15,000, or $27,000.
Dividing $27,000 by $350,000 gives a cap rate of about 7.71%. Monthly NOI works out to $2,250, and the expense ratio is $15,000 divided by $42,000, or roughly 35.7%. On paper, that cap rate would be considered strong for a stable suburban rental in many markets, though the right benchmark always depends on location. Comparing this property to a similar one nearby priced at $400,000 but producing the same $27,000 NOI would yield a lower cap rate of about 6.75%, showing how the same income stream looks less attractive purely because of a higher purchase price.
How cap rates are typically read
| Cap rate | Common interpretation |
|---|---|
| Under 4% | Low yield, typical of high-demand, low-risk primary markets |
| 4% - 7% | Moderate yield, common in stable suburban or secondary markets |
| 8% and above | Higher yield, often reflecting higher risk, older stock, or weaker demand |
Ranges reflect widely used industry rules of thumb and vary by market.
Frequently asked questions
Does cap rate include the mortgage payment?
No. Cap rate is calculated before financing costs, using only net operating income and property value. That is intentional, since it lets buyers with different loan terms or all-cash offers compare the same property on equal footing, without financing choices distorting the comparison.
What counts as an operating expense?
Property taxes, insurance, management fees, routine repairs and maintenance, utilities the owner pays, and a reasonable vacancy allowance all belong in operating expenses. Capital improvements, mortgage payments, and depreciation are excluded, since NOI measures ongoing operating performance rather than financing or one-time capital spending.
Is a higher cap rate always a better deal?
Not necessarily. A higher cap rate often reflects greater perceived risk, such as a weaker location, older building systems, or a less stable tenant base, rather than pure upside. It should prompt closer due diligence rather than be treated as an automatic sign of value.
Can cap rate be used for a property I plan to renovate?
Cap rate reflects current income and value, so it works best for stabilized, income-producing properties. For a renovation project where income and value will change significantly, a projected NOI after stabilization gives a more meaningful going-forward cap rate than the current, pre-renovation figures.
How does vacancy affect the cap rate calculation?
Vacancy reduces gross rental income, which lowers NOI and therefore the cap rate if it is not already reflected in the income figure entered. Using a realistic, market-typical vacancy assumption rather than a fully leased best case gives a more dependable cap rate for comparison purposes.
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