Calculate Cap Rate Calculator
Find a rental property's capitalization rate in seconds: net operating income divided by current market value. Compare deals on an apples-to-apples basis, with or without financing.
| Net operating income (NOI) | $0 |
| Annual gross rental income | $0 |
| Annual operating expenses | $0 |
| Property value | $0 |
| Monthly net operating income | $0 |
How it works
Cap rate = Net Operating Income ÷ Property Value. NOI is your annual gross rent minus operating expenses (tax, insurance, maintenance, management, vacancy). Mortgage payments are deliberately excluded, so the cap rate measures the property itself — not your financing.
Formula & worked example
Formula: NOI (net operating income) = annual rental income − annual operating expenses. Cap rate = NOI ÷ property value × 100.
Worked example: Rent of $24,000 a year with $7,200 of expenses leaves an NOI of $16,800. On a $240,000 property, the cap rate is $16,800 ÷ $240,000 = 7.00% — an NOI of $1,400 a month.
When to use this
- Two rental listings sit at different prices and you want one number that compares the properties themselves, not their loans.
- A seller or agent quotes an NOI and a cap rate and you want to rebuild both from the rent and expenses before believing them.
- You need a quick screen on a property before spending time on full financing and cash-flow analysis.
- You know the cap rate your market trades at and want to check what price a property's income actually justifies.
How to use it, step by step
- Enter the asking price or current market value of the property.
- Enter the full annual rent — all units, at the rents you have verified, not the seller's hoped-for increases.
- Enter annual operating expenses, including a vacancy allowance and management, but never the mortgage.
- Read the NOI first, then the cap rate it produces.
- Re-run with your own expense estimates in place of the listing's; seller expense sheets are famously thin.
What the inputs mean
| Input | What it is | Typical values |
|---|---|---|
| Property value | Asking price or appraised market value | The denominator every cap rate is judged against |
| Annual gross rental income | A full year of rent across all units | Monthly rent times 12, before expenses |
| Annual operating expenses | The cost of running the property for a year | Tax, insurance, maintenance, management, vacancy, HOA |
Another worked example
A $425,000 property renting for $42,000 a year, with $15,300 of annual operating expenses, has a net operating income of $26,700 — $2,225 a month — and a cap rate of 6.28%. That 6.28% is the property's unleveraged yield: what it earns before any mortgage, down payment or financing choice enters the picture.
Frequently asked questions
What is a good cap rate?
Most residential rentals fall between 4% and 10%. Higher usually means more risk (or a cheaper market); lower means a pricier, more stable market. Always compare cap rates within the same metro, not across the country.
Cap rate vs. cash-on-cash return — what's the difference?
Cap rate assumes an all-cash purchase and ignores financing. Cash-on-cash measures return on the actual cash you put in, so it changes with your down payment and loan terms. Use both: cap rate to compare properties, cash-on-cash to judge your deal.
Does the cap rate include the mortgage?
No. Operating expenses exclude debt service — principal and interest never go in the cap rate formula. That's what makes it financing-neutral and useful for comparing two properties side by side.
Why do the cap rates in listings often look too good?
Because the two inputs are easy to flatter: rent quoted at aspirational 'pro forma' levels the property has never achieved, and expenses that quietly omit vacancy, management, repairs reserves or the tax increase a sale triggers. Rebuild the NOI with the property's actual rent roll and a full expense list before comparing the rate to anything — a cap rate is only as honest as its NOI.
Can I work backwards from a cap rate to a price?
Yes — the formula rearranges to value equals NOI divided by cap rate. If you know a property's NOI and the rate similar local properties trade at, that division gives the price at which this property would match the market. Offering more than that means accepting a thinner return than the market standard; offering less is where the bargaining starts.
Should vacancy and management be in the expenses if I manage it myself?
Yes to both. A vacancy allowance keeps one empty month from wrecking the year's figures, and charging management — even when the manager is you — keeps the cap rate comparable with professionally managed properties and honest about your time. A property that only works with free management and zero vacancy is priced on two favours you are doing it.
💰 Take the next step
See your return on actual cash invested with the cash-on-cash calculator.