Cap Rate Calculator
Calculate the capitalization rate on any investment property from gross rent, vacancy, and operating expenses, the standard metric for comparing real estate investments.
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Enter your values above to see the results.
Tips & Notes
- ✓Compare your property cap rate to prevailing market cap rates for similar properties — buying below market cap rate means overpaying; buying above means underpaying relative to market income.
- ✓Cap rate does not account for financing — a property with a 5% cap rate and 7.5% mortgage rate has negative leverage, meaning debt destroys returns rather than amplifying them.
- ✓Rising interest rates compress cap rates by increasing the cost of financing relative to income — this creates downward pressure on property values in rising rate environments.
- ✓Cap rate is an unlevered metric — it applies equally to cash buyers and leveraged buyers and allows comparison regardless of financing structure.
- ✓Use the income approach to value (NOI divided by prevailing cap rate) to cross-check any purchase price against what the market says the income stream is worth.
- ✓Multi-family properties are typically valued almost entirely on cap rate — the income approach is the primary valuation method, making NOI management directly tied to property value.
Common Mistakes
- ✗Using gross yield instead of cap rate to compare investment properties — cap rate is the industry standard because it includes all operating expenses in the income figure.
- ✗Accepting seller-provided pro forma NOI without verification — sellers present optimistic vacancy, expense, and rent assumptions; always verify with actual rent rolls and tax returns.
- ✗Not adjusting for below-market rents when buying — a property with existing below-market leases has a current cap rate lower than its stabilized cap rate; model the transition period carefully.
- ✗Ignoring capital expenditure reserves in the expense calculation — excluding roof, HVAC, and major system reserves understates true expenses and inflates the cap rate and NOI.
- ✗Applying residential valuation methods (comparable sales) to multi-family properties without running the income approach — commercial properties are primarily valued on income, not comps.
- ✗Treating cap rate as the complete return picture — cap rate excludes appreciation, mortgage paydown, and tax benefits that together constitute the full investment return.
Cap Rate Calculator Overview
The capitalization rate (cap rate) is the fundamental metric of real estate investment analysis. It measures the unlevered income return on a property — what it would yield if purchased all-cash. This makes it the only metric that allows honest comparison between properties of different sizes, prices, and markets, independent of how they are financed.
Understanding cap rates allows you to evaluate whether a property is fairly priced, compare investments across markets, and benchmark a deal against prevailing market rates.
What each field means:
- Property Value — the purchase price or current market value of the property
- Gross Rent — total annual rental income at full occupancy (monthly rent times 12)
- Vacancy — expected percentage of time the property is unoccupied; reduces effective income
- Operating Expenses — all annual costs: taxes, insurance, maintenance, management, and reserves
- Management Fee — property management costs as a percentage of collected rent
What your results mean:
- Cap Rate — Net Operating Income divided by property value; the unlevered annual return percentage
- Net Operating Income — effective gross income minus all operating expenses; the property income before financing
- Effective Gross Income — gross rent adjusted for vacancy; what the property actually collects
- Total Expenses — the complete annual cost of operating the property before debt service
Example — $350,000 property, $28,800 gross annual rent, 5% vacancy, $11,500 expenses, 8% management:
Gross annual rent: $28,800 ($2,400/month) Vacancy loss (5%): $1,440 Effective gross income: $27,360 Management fee (8% of effective gross): $2,189 All other operating expenses: $11,500 Total expenses: $13,689 Net Operating Income: $27,360 - $13,689 = $13,671 Cap rate: $13,671 / $350,000 = 3.91% Market cap rate for similar properties: 5.5% This property is overpriced relative to market cap rates. Fair value at 5.5% cap rate: $13,671 / 0.055 = $248,564
EX: Using cap rate to determine fair value — $13,671 NOI At 4.0% prevailing cap rate: property worth $341,775 At 5.0% prevailing cap rate: property worth $273,420 At 6.0% prevailing cap rate: property worth $227,850 At 7.0% prevailing cap rate: property worth $195,300 Cap rate is the inverse of price-to-income: higher prevailing cap rates mean properties are worth less per dollar of income.
Cap rate by NOI and property value:
| Annual NOI | Property $250k | Property $350k | Property $500k |
|---|---|---|---|
| $12,000 | 4.8% | 3.4% | 2.4% |
| $18,000 | 7.2% | 5.1% | 3.6% |
| $25,000 | 10.0% | 7.1% | 5.0% |
| $35,000 | 14.0% | 10.0% | 7.0% |
Typical cap rates by property type and market:
| Property Type / Market | Cap Rate Range | Implication |
|---|---|---|
| Single-family, major city | 3-5% | Appreciation-driven market |
| Single-family, secondary market | 6-9% | Income-driven market |
| Multi-family, major city | 4-6% | Lower yield, high demand |
| Multi-family, secondary market | 7-10% | Higher yield, moderate growth |
Cap rate compression — when prevailing cap rates fall — increases property values. If cap rates fall from 6% to 5% in a market, a property generating $18,000 NOI increases in value from $300,000 to $360,000 — a 20% gain with no change in income. This is why institutional investors in real estate focus heavily on cap rate trends as a leading indicator of property value movements, separate from any changes in income.
Frequently Asked Questions
Cap rate (capitalization rate) is the ratio of Net Operating Income to property value, expressed as a percentage. Formula: Cap Rate = NOI / Property Value. NOI is gross rent minus vacancy minus all operating expenses (taxes, insurance, maintenance, management, reserves) before any mortgage payment. A property worth $400,000 generating $24,000 in annual NOI has a 6% cap rate. Cap rate measures the unlevered income return — what the property yields if purchased all-cash. It is the standard metric for comparing investment properties because it is independent of financing structure.
What constitutes a good cap rate depends on property type, location, and current interest rate environment. In major metropolitan markets, cap rates of 4-6% are typical for quality properties. In secondary and tertiary markets, cap rates of 6-10% are more common. As a general rule, the cap rate should exceed the cost of financing for positive leverage — when cap rates fall below mortgage rates, debt destroys returns rather than amplifying them. When mortgage rates rose to 7%+ while many market cap rates remained at 5-6%, this created negative leverage situations across many markets.
Cap rate and property value have an inverse relationship — higher cap rates mean lower prices per dollar of income, and lower cap rates mean higher prices. This is why cap rate is used as a valuation tool: Property Value = NOI / Cap Rate. A property generating $20,000 in annual NOI is worth $400,000 at a 5% cap rate, $333,000 at a 6% cap rate, and $286,000 at a 7% cap rate. When prevailing market cap rates fall (cap rate compression), existing properties increase in value without any change in income — the same NOI is capitalized at a lower rate, producing a higher value.
Cap rate measures the unlevered return on the full property value, ignoring financing. Cash-on-cash return measures the cash flow return on the actual cash invested after accounting for financing. A property with a 6% cap rate might have a 0% or negative cash-on-cash return if financed with a 7.5% mortgage, because the debt costs more than the unlevered income. Conversely, when cap rates exceed mortgage rates (positive leverage), cash-on-cash returns can significantly exceed cap rates. Cap rate is used for property comparison and valuation; cash-on-cash is used to evaluate actual investment performance given a specific financing structure.
Net Operating Income = Effective Gross Income minus all operating expenses. Effective Gross Income = Potential Gross Income minus vacancy and credit loss. Operating expenses include: property taxes, insurance, maintenance and repairs, property management fees, landscaping, utilities paid by the owner, advertising, and capital expenditure reserves. Operating expenses do NOT include mortgage payments, depreciation, or income taxes. The standard expense ratio for residential rental properties runs 35-50% of potential gross income, varying significantly by property age, quality, and management approach.
Rising interest rates create upward pressure on cap rates through two mechanisms. First, as financing costs rise, investors require higher income returns to justify real estate versus safe alternatives. Second, higher mortgage rates reduce buyer purchasing power and demand, putting downward pressure on prices — lower prices with the same NOI implies higher cap rates. When mortgage rates rose sharply in 2022-2023, many markets saw significant cap rate expansion particularly for income properties priced at cap rates below prevailing mortgage rates, creating negative leverage situations that repriced the market.