Cap Rate Calculator

Overview

How to use this calculator

1. Estimate or pull your property’s annual net operating income, including realistic vacancy and operating expenses.
2. Enter that NOI along with the property’s market value or the purchase price you are considering.
3. Review the resulting cap rate percentage and compare it to the ranges you see for similar properties in your market.
4. Optionally adjust NOI or value to test scenarios, such as post-renovation rents or different offer prices.

Inputs explained

Net operating income

Annual income after operating expenses, vacancy, maintenance, management, and property-level costs—but before mortgage payments, capital expenditures, and income taxes. Use stabilized NOI based on realistic rents and expenses, not best-case pro forma numbers.

Property value

The market value or purchase price you’re evaluating. For comparisons across multiple deals, using current market value (including any planned renovations) gives a more apples-to-apples view than using a below-market purchase price alone.

Outputs explained

Cap rate

The property’s capitalization rate as a percentage, calculated by dividing annual NOI by property value. A 7% cap rate means the property generates NOI equal to 7% of its value before financing costs and taxes.

When to use it

• Screening rental properties quickly across different markets or brokers to see which ones meet or exceed your target return range.
• Comparing two listings with different prices and expense loads to see which produces a stronger operating yield.
• Testing how renovations, rent increases, or improved expense control could shift the cap rate post-stabilization.
• Sanity-checking broker pro formas by plugging in your own NOI assumptions and comparing resulting cap rates to local comps.
• Communicating the operating performance of a property to partners or lenders in a simple, widely understood metric.

Tips & cautions

• Use a stabilized NOI that includes vacancy, property taxes, insurance, management, maintenance, and realistic repairs/turnover; optimistic pro formas can make cap rates look better than real performance.
• Cap rate is a pre-financing metric; pair it with DSCR, cash-on-cash return, and IRR when you want to incorporate loan terms and long-term cash flow modeling.
• When comparing multiple deals, base value on current market value rather than just contract price—especially if you purchased at a discount or plan major renovations.
• Be sure to separate recurring operating expenses from one-time capital expenditures like roof replacements or major system upgrades; those are better modeled as CapEx or reserves, not in NOI.
• Look at cap rates in context: higher-risk locations or heavy value-add projects may command higher cap rates, while newer, stabilized assets in prime locations often trade at lower cap rates.
• Does not include debt service, capital expenditure reserves, or income taxes—cap rate is a pure operating return and should not be the only metric used to evaluate a deal.
• Highly sensitive to NOI estimates; small changes in rent assumptions or expenses can move the cap rate materially, especially at lower yields.
• Does not capture appreciation potential, timing of cash flows, lease-up risk, or nuanced financing structures such as interest-only periods or variable rates.
• Cap rate alone can be misleading for short-term holds, heavy repositioning projects, or properties with unusual expense structures; use it as one lens, not a full feasibility study.

Worked examples

Deep dive

FAQs

Does cap rate include mortgage payments or loan terms?

No. Cap rate is calculated before financing and reflects the property’s operating performance only. To evaluate how debt affects returns, you’ll want to look at metrics like cash-on-cash return, DSCR, and IRR that incorporate loan payments and leverage.

Should I use purchase price or current market value in the denominator?

For comparing deals and tracking performance over time, current market value usually gives the fairest picture. Purchase price is useful for understanding your initial yield, but if you bought at a discount or the market has moved, market value is more appropriate for apples-to-apples cap rate comparisons.

What is a good cap rate?

It depends on market, asset class, and risk profile. Core assets in prime locations may trade at lower cap rates (for example, 4–6%), while value-add or higher-risk properties may require higher cap rates (for example, 7–10%+) to compensate for additional risk. Always compare to recent local sales and your own risk tolerance.

Does NOI include property taxes and insurance?

Yes. Operating expenses used in NOI typically include property taxes, insurance, repairs and maintenance, management fees, utilities you pay, and a vacancy allowance. Mortgage payments, income taxes, and large one-time capital improvements are excluded.

How does cap rate differ from cash-on-cash return?

Cap rate looks at property income relative to value, independent of how you finance the property. Cash-on-cash return measures annual cash flow relative to your actual cash invested after financing, so it incorporates loan payments and leverage. Many investors use cap rate for screening and cash-on-cash for evaluating the impact of specific loan structures.

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