Cap Rate Calculator
Enter annual numbers to estimate net operating income (NOI) and capitalization rate.
Formula used: Cap Rate = NOI ÷ Property Value. Financing (mortgage terms) is intentionally excluded from cap rate.
What Is a Cap Rate?
Cap rate (short for capitalization rate) is one of the most common real estate investment metrics. It measures a property's unlevered return, which means it looks at income and expenses before debt service. Investors use it to compare properties quickly, estimate value, and understand risk/return trade-offs.
Cap Rate Formula
The core formula is straightforward:
Cap Rate = Net Operating Income (NOI) ÷ Property Value
Where:
- NOI = Effective gross income minus operating expenses
- Effective gross income = Gross income + other income − vacancy loss
- Property value = Current market value or acquisition price
How to Use This Cap Rate Calculator
To get a realistic cap rate estimate, use annual totals and avoid mixing monthly and yearly numbers.
- Enter the purchase price or current market value.
- Add annual rent and any other recurring income.
- Estimate vacancy/credit loss (often 3%–10% depending on market).
- Include true operating expenses: taxes, insurance, maintenance, management, utilities paid by owner, HOA, and reserves.
- Click Calculate Cap Rate to see NOI, cap rate, and quick benchmarks.
What Is a “Good” Cap Rate?
There is no single “good” cap rate. It depends on location, asset quality, tenant profile, property type, and interest rate environment.
General Rule of Thumb
- Lower cap rates (e.g., 3%–5%): often prime markets, newer assets, lower perceived risk, and stronger appreciation expectations.
- Mid-range cap rates (e.g., 5%–8%): balanced risk/reward in many mainstream markets.
- Higher cap rates (8%+): may indicate higher cash yield but also higher risk, deferred maintenance, weaker location, or tenant instability.
Cap Rate vs. Cash-on-Cash Return
New investors often confuse these two metrics:
- Cap Rate ignores financing and evaluates the property itself.
- Cash-on-Cash Return includes debt and measures return on actual cash invested.
Use cap rate for property comparison and valuation, then layer in financing metrics for your personal return analysis.
Common Mistakes When Calculating Cap Rate
- Using gross rent only and ignoring vacancy.
- Underestimating operating expenses, especially maintenance and capital reserves.
- Including mortgage payments in operating expenses (they are financing costs, not operating costs).
- Relying on pro forma numbers without verifying trailing twelve months (TTM) performance.
- Comparing different property classes directly without adjusting for location and risk.
Practical Example
Suppose a duplex costs $400,000 and brings in $48,000/year in rent plus $1,200 in laundry income. If vacancy is 5%, vacancy loss is $2,460. Effective gross income is $46,740. If annual operating expenses are $17,000, NOI becomes $29,740.
Cap rate = $29,740 ÷ $400,000 = 7.44%.
Final Thoughts
Cap rate is an excellent first-pass screening tool, but it should never be your only metric. Pair it with rent growth assumptions, market trends, repair forecasts, tenant quality, and financing analysis. The best investors combine simple formulas with disciplined due diligence.