Cap Rate Calculator - Capitalization Rate for Real Estate

Divide a property's net operating income by its price to see the cap rate, and judge a deal in seconds.

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The one number that tells you if a property is worth it

Two rental properties, both listed at $400,000, sitting on the same street. One is a quiet moneymaker. The other will bleed you slowly for years. The price tag tells you nothing about which is which. The cap rate tells you almost everything.

Cap rate (short for capitalization rate) is real estate's quickest measure of return, and the formula is refreshingly simple: Cap Rate = Net Operating Income / Property Value. Net operating income, or NOI, is the annual rent the property generates minus all operating expenses (property taxes, insurance, maintenance, management, vacancy allowance), but before any mortgage payment. Divide that NOI by what you pay for the property, and you get a percentage that says: if I bought this in cash, what yearly return would the property itself throw off?

Run the numbers on that $400,000 property. Say it brings in $48,000 a year in rent and costs $20,000 a year to operate. Your NOI is $28,000. Divide by the $400,000 price and you get a 7% cap rate. Now the second property, same price, same rent, but older systems push operating costs to 32,000. Its NOI is only16,000, a 4% cap rate. Same listing price, nearly double the return on one. That's the X-ray cap rate gives you that the asking price hides.

The deliberately excluded piece is your financing. Cap rate ignores your mortgage entirely, and that's a feature, not a flaw. By stripping out the loan, cap rate lets you compare the underlying quality of two properties on equal footing, regardless of how each buyer finances them. Your personal return after a loan (cash-on-cash return) is a separate calculation. Cap rate answers a purer question: how good is the asset itself?

This calculator does the division instantly. Enter the property value and the NOI, and it returns the cap rate plus context on how it stacks up, so you can spot the quiet moneymaker before the listing photos fool you.

Reading a cap rate, and the trap of chasing high numbers

Once you have a cap rate, the obvious question is: is it good? The honest answer is that cap rates are relative, what's strong in one market is weak in another. Here's how seasoned investors read them:

  • 4% to 5% typically signals a prime property in a hot, low-risk market (think a well-located building in a major coastal city). Lower return, but stable and likely to appreciate.
  • 6% to 8% is the common range for solid rentals in stable mid-sized markets, a balance of income and reasonable risk.
  • 9% and up often means higher income relative to price, but it usually comes with higher risk: a softer location, older building, or more vacancy and turnover.

Here's the counterintuitive trap. A high cap rate is not automatically a better deal. That tempting 10% cap rate often exists precisely because the market has priced in problems, a declining neighborhood, deferred maintenance, or unreliable tenants. A low cap rate can reflect a premium, low-risk property that will hold value through a downturn. Cap rate measures return, but it's also a thermometer for risk, and the two move together.

Use cap rate as your first-pass filter, then dig deeper. Verify the NOI is honest (sellers love to understate expenses and inflate projected rent), compare against recent sales of similar properties in the same area, and remember that cap rate says nothing about appreciation or your financing. It's the opening question of a smart analysis, not the final verdict. This calculator provides estimates based on the information you enter. For advice tailored to your situation, consult a qualified financial professional.

Worked example using the income and expense mode

The calculator works two ways. Enter NOI Directly divides the net operating income you type by the property value. Calculate NOI from Income & Expenses builds NOI for you: gross annual rent × (1 − vacancy rate) − annual operating expenses. Either way, cap rate = NOI ÷ property value × 100.

Take the defaults in the detailed mode: a $500,000 property, $60,000 of gross annual rent, a 5% vacancy allowance and $17,000 of operating expenses.

  • Effective gross income: $60,000 × 0.95 = $57,000
  • NOI: $57,000 − $17,000 = $40,000 (about $3,333 a month)
  • Cap rate: $40,000 ÷ $500,000 = 8.00%
  • Price per 1 of NOI:500,000 ÷ $40,000 = $12.50, the inverse of the cap rate

The NOI sensitivity chart then shows what happens if income slips or grows with the price held fixed: NOI 20% lower gives 6.40%, 10% lower gives 7.20%, 10% higher gives 8.80% and 20% higher gives 9.60%. A one-percentage-point cap rate swing on a $500,000 purchase is $5,000 a year of NOI, which is why a single vacant month or an unbudgeted roof reserve changes the picture so quickly.

The badge compares your result with the bands built into the tool: 3% to 5% labelled core (lower risk), 5% to 7% value-add, 7% to 10% opportunistic and 10% to 15% high risk. At 8.00% the example lands in the opportunistic band. Those labels are a rough guide; a market where 8% is normal for stabilized apartments is different from one where 5% is normal.

What goes into NOI, and what the cap rate leaves out

Cap rate is only as honest as the NOI behind it. The operating expense box should include property taxes, insurance, repairs and maintenance, property management (even if you self-manage now), utilities the owner pays, HOA or common-area costs, landscaping, pest control and turnover costs such as cleaning and listing fees. It should not include mortgage principal or interest, depreciation or income tax, because cap rate is meant to describe the property, not the owner's financing.

  • Capital expenditures. Roofs, HVAC systems and parking lots are often excluded from a seller's NOI. Many buyers deduct a reserve (for example $250 to $300 per apartment unit per year) before calculating cap rate so two offers are compared on the same basis.
  • Pro forma versus actual. A listing's cap rate may use projected market rents and a 0% vacancy. Ask for the trailing 12 months of income and expenses and recalculate.
  • Property tax reassessment. In many states taxes reset toward the purchase price after a sale. The seller's old tax bill can overstate NOI by thousands of dollars.
  • Price versus value. Use the price you would actually pay. Entering an asking price you expect to negotiate down understates the cap rate you would earn.
  • Financing. Cap rate ignores leverage. When the mortgage rate is above the cap rate, borrowing lowers your cash return, which is why an 8% cap rate can still produce thin cash flow with a 7.5% loan.
  • Growth. A cap rate is a one-year snapshot. It says nothing about rent growth, appreciation or the price you might sell for later.

Negative NOI produces a negative cap rate, and a result under 3% shows a “Very Low” badge: in both cases the income does not support the price entered.

Frequently Asked Questions

Common questions about the Cap Rate Calculator - Capitalization Rate for Real Estate

Cap rate equals net operating income divided by property value. First find NOI by subtracting annual operating expenses from annual rental income, before any mortgage payment. Then divide by the purchase price. A property earning $28,000 NOI on a $400,000 price has a 7% cap rate. The result tells you the annual return the property would generate if you bought it with cash.

Sources & References

Mortgages and home-buying

Consumer guidance on mortgages, closing costs, and home financing.
→Source: Consumer Financial Protection Bureau (CFPB)

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