Cap Rate Calculator – Capitalization Rate
Calculate the capitalization rate of a rental property, or solve for NOI or property value. Enter rental income, vacancy, and operating expenses; fill any two of value, NOI, and cap rate to get the third.
Calculate Cap Rate, NOI, or Property Value
Cap Rate Formula
Where:
- \(\text{NOI}\) — net operating income: annual rental income after vacancy, minus all operating expenses (property taxes, insurance, maintenance, management, utilities, HOA, and other costs), but before any mortgage payments
- \(\text{Property Value}\) — the purchase price or current market value of the property
The formula expresses the property's unleveraged annual income yield: what percentage of its value the property earns in net operating income each year, ignoring financing, appreciation, and taxes.
NOI itself is built up in two steps:
\[ \text{EGI} = \text{Gross Income} \times (1 - \text{Vacancy Rate}), \qquad \text{NOI} = \text{EGI} - \text{Operating Expenses} \]
The capitalization rate also implies the other two quantities when rearranged: \( \text{Value} = \text{NOI} / \text{Cap Rate} \) and \( \text{NOI} = \text{Value} \times \text{Cap Rate} \) — which is exactly what this calculator does when you leave one field blank.
Cap Rate – Calculation Example
Example: a single-family rental is purchased for $300,000. The owner collects $24,000 a year in gross rent, expects a 5% vacancy rate, and pays $2,400 in property taxes, $900 in insurance, $600 in other expenses, plus 8% of collected rent each for maintenance and property management.
Step 1 — effective gross income (EGI):
\[ 24{,}000 \times (1 - 0.05) = 22{,}800 \ \$/\text{yr} \]
Step 2 — operating expenses:
\[ 2{,}400 + 900 + 600 + 2 \times (0.08 \times 22{,}800) = 2{,}400 + 900 + 600 + 3{,}648 = 7{,}548 \ \$/\text{yr} \]
Step 3 — net operating income (NOI):
\[ 22{,}800 - 7{,}548 = 15{,}252 \ \$/\text{yr} \]
Step 4 — cap rate:
\[ \text{Cap Rate} = \frac{15{,}252}{300{,}000} \times 100\% \approx 5.084\% \]
Result: the property has a cap rate of about 5.08% — a low-to-moderate yield typical of larger, high-demand markets.
How to use the calculator
- Enter your Gross rental income in the Rental income section and choose per month or per year from the Period dropdown. Monthly rent is automatically multiplied by 12.
- Set the Vacancy rate — the share of potential rent lost to empty units or tenants not paying. If you are unsure, 5% is a common planning assumption.
- In the Operating expenses section, pick Itemized or Single total for the Expense entry. Itemized lets you fill in Property taxes, Insurance, Utilities, HOA fees, Other expenses, and Maintenance and Property management (each either as a dollar amount per year or as a percentage of collected rent).
- Under Value, NOI, or cap rate — fill any two: enter the Property value or purchase price, the Net operating income (NOI), and/or the Cap rate. Leave exactly one of the three blank — the calculator solves for it. NOI is usually computed automatically from your income and expenses; only type a number there if you want to override that figure.
- Optionally, complete the cash-on-cash section: enter your Cash invested (down payment) and Annual mortgage payment (debt service) to see your annual cash flow after debt service and the Cash-on-cash return on your invested cash.
- Press Calculate. The results show your effective gross income, total operating expenses, NOI, cap rate, property value, an interpretation of the cap rate, and a full income and expense breakdown table.
What is a capitalization rate?
The capitalization rate — cap rate for short — is the standard yardstick for valuing income-producing real estate. It is the ratio of a property's net operating income to its value, expressed as a percentage. A 6% cap rate means the property generates net operating income equal to 6% of its price each year, before financing and taxes. In effect, it answers the question: if I paid cash for this building, what annual income yield would I get?
Because it excludes the mortgage, the cap rate measures the property's performance, not the investor's financing choices. That makes it ideal for comparing buildings against each other, tracking a market over time, or sanity-checking an asking price. A property listing at a cap rate far above comparable sales is either a bargain or — more often — a property with problems the numbers aren't showing.
Interpreting the number matters as much as computing it. Typical US residential cap rates fall roughly between 4% and 10%. Low cap rates (4–6%) are usual in prime big-city markets where investors accept thin cash yields in exchange for appreciation and stability. Higher cap rates (8–10%) are common in smaller cities and lower-appreciation areas, but they can also signal risk: distressed properties, weak tenant demand, or optimistic rent assumptions. Never compare cap rates across different markets or asset classes without context — a "better" number often just means a riskier address.
Investors also use the cap rate in reverse. If the market for similar buildings trades at a 6.5% cap rate and a property produces $19,000 in NOI, its implied value is \( 19{,}000 / 0.065 \approx \$292{,}000 \). This is how appraisers and commercial buyers price income property, and it is the calculation this calculator performs when you leave the value field blank.
Limitations and practical tips
- Never include the mortgage. Principal and interest payments are financing costs, not operating costs. Cap rate deliberately ignores debt; use the cash-on-cash section of the calculator to measure your leveraged return instead.
- Garbage in, garbage out. The result is only as good as your vacancy and expense assumptions. Understated maintenance, skipped reserves for the roof and appliances, or a rosy vacancy rate will inflate the cap rate. Compare the computed NOI against the seller's actual financials (rent rolls, tax bills, and repair history) before trusting it.
- A high cap rate is not automatically a good deal. Weigh the income yield against appreciation expectations, location quality, and property condition, and remember that the number can be manipulated by using projected (rather than actual) income.
- Cap rate vs. other metrics. The cap rate ignores financing, income taxes, depreciation benefits, and future appreciation. Pair it with mortgage payoff planning and your debt-to-income ratio to see the full picture of an investment, since most buyers combine a cap rate with a loan.
- Check whether annual figures include capital expenditures (a new roof is not a routine operating expense but it is a very real cost), and keep percentage-based expenses consistent — maintenance and management fees in this calculator are percentages of collected rent (after vacancy), which matches industry practice.
Frequently Asked Questions
How do I calculate the cap rate by hand, step by step?
Start with the annual gross rent the property would collect fully occupied. Subtract the vacancy loss (gross rent × vacancy rate) to get effective gross income. Then subtract all operating expenses — taxes, insurance, maintenance, management, utilities, HOA — to get NOI. Finally divide NOI by the purchase price or value: \( \text{Cap Rate} = \text{NOI} / \text{Value} \times 100\% \). For example, NOI of $15,000 on a $250,000 property is a 6% cap rate.
Why does my calculated cap rate differ from the seller's advertised one?
Sellers often quote a pro forma cap rate built on projected rents, full occupancy, and understated expenses, rather than actual current figures. If their number assumes below-market vacancy or skips maintenance reserves, it will look better than reality. Always rebuild the NOI from the rent roll, tax bill, and repair history, and compare your result to their claim — a gap of 1–2 percentage points usually tells you which assumptions were optimistic.
What's the difference between cap rate, gross yield, and cash-on-cash return?
Gross yield is just annual rent divided by price, ignoring all expenses — it always looks higher. Cap rate uses net operating income, so it reflects real operating costs but still ignores financing. Cash-on-cash return adds the mortgage back in: it is your annual cash flow after debt service divided by the cash you actually invested. Use cap rate to compare properties, gross yield for a quick screen, and cash-on-cash to judge your specific deal.
Should capital expenditures and reserves be included in operating expenses?
Strictly, no — a new roof or HVAC replacement is a capital expenditure, not a routine operating cost, so standard NOI excludes it. But many investors create a reserve allowance (e.g., $200–300 per unit per year) and treat it as an operating expense to get a more realistic cap rate. Whichever approach you take, be consistent: if two properties are compared and only one carries reserves, the comparison is misleading.
What cap rate should I use when estimating what a property is worth?
Use the cap rate that comparable properties actually trade at in the same market — ask a local broker or check recent sales of similar buildings. If similar properties trade at 7%, a property with $21,000 NOI is worth roughly \( 21{,}000 / 0.07 = \$300{,}000 \) in that market. Choosing a lower cap rate inflates your value estimate, so resist the temptation to pick the number that justifies the price you want.
What are going-in and exit cap rates, and why do they matter?
The going-in (entry) cap rate is today's NOI divided by today's purchase price. The exit (terminal) cap rate is what you assume the property will sell for when you dispose of it, usually 0.5–1 percentage point higher to be conservative. Exit cap rates drive long-horizon value projections: a small change in the exit assumption can swing an estimated resale value by tens of thousands of dollars, so model it pessimistically rather than optimistically.
Can a cap rate be negative or above 100%?
Yes to both, and each is a red flag. A negative cap rate means operating expenses exceed collected rent even before the mortgage — the property loses money as a business. A cap rate far above 10–12% almost always signals something the numbers hide: a distressed building, a rough location, a tenant on the verge of leaving, or wildly inflated income assumptions. Neither result should be taken at face value — verify the underlying figures.