Cap Rate Calculator

What Cap Rate Is Really Measuring

Cap rate answers a specific question: if you bought this property in cash, with no mortgage at all, what percentage return would its income alone generate on your money each year? That's a deliberately narrow question, but it's a useful one, because it strips financing entirely out of the picture. A property's cap rate doesn't change based on whether you put 20% down or paid cash — it's a property-level metric, not a deal-structure-level one.

That makes cap rate the standard way commercial and residential investors compare properties across different markets, price points, and financing situations on equal footing. It's not a complete investment thesis by itself — it says nothing about appreciation potential, neighborhood trajectory, or your specific financing costs — but as a first-pass screening tool alongside the Rental Yield Calculator, it's hard to beat.

How to Use This Calculator

Cap rate is only as trustworthy as the NOI behind it, so accuracy on the expense side matters as much as the income side:

1. Property value

Use the purchase price for a deal you're evaluating, or a current appraised or market value if you already own the property.

2. Gross rental income and vacancy

Use achievable, current market rent — not a post-renovation projection — and a vacancy assumption that reflects your specific market and property type, not a blanket national average.

3. Operating expenses

This is where pro forma numbers from a seller's listing tend to fall short. Insurance, property tax, and maintenance in particular are often understated in marketing materials. Where possible, verify against actual tax records, insurance quotes, and historical maintenance spending rather than the seller's estimate.

4. Compare across your shortlist, not in isolation

A single cap rate number means little on its own — its real value comes from comparing several properties in the same market side by side, or comparing the same property's cap rate against the typical range for that market and asset class.

The Math Behind Cap Rate

The Cap Rate Calculator computes net operating income (NOI) — gross rent minus vacancy and operating expenses, excluding financing — then expresses it as a percentage of property value.

Net operating income

NOI = (Gross Rent × (1 − Vacancy %)) − Operating Expenses

Cap rate

Cap Rate = (NOI ÷ Property Value) × 100

Operating expenses include property management, insurance, property tax, maintenance, HOA, and other recurring costs — but never mortgage principal or interest, since cap rate is an unlevered metric used to compare deals independent of financing.

Worked examples

Example A — a mid-range multifamily property. A $500,000 property with $48,000 in gross annual rent, a 5% vacancy allowance, and roughly $18,600 in annual operating expenses produces an NOI near $27,000 — a cap rate of about 5.4%.

Example B — a higher-expense property at the same price. Take the same $500,000 property and same rent, but with an older building requiring higher maintenance and insurance costs — say $26,000 in total annual operating expenses instead of $18,600. NOI drops to around $19,600, and cap rate falls to roughly 3.9%. Same price, same rent, meaningfully different return — which is exactly why expense accuracy matters as much as the rent figure.

Tips for Best Results

• 💡 Use cap rate to compare, not to decide alone Cap rate is great for comparing similar properties in a market, but should be weighed alongside growth potential and risk.
• 💡 Lower cap rate isn't always worse Lower cap rates often reflect lower-risk, higher-appreciation markets — the tradeoff is intentional, not a red flag by itself.
• 💡 Know your market's typical range What counts as a "good" cap rate varies enormously by city and asset class — a rate that's attractive in one market may be mediocre in another.
• 💡 Pair with cash-on-cash return for the financed picture Cap rate tells you about the property; the Cash-on-Cash Return Calculator tells you about the deal as financed — run both before deciding.

Common Mistakes to Avoid

• ⚠️ Common mistake: including debt service in NOI Mortgage payments should never be subtracted when calculating NOI — cap rate is meant to be capital-structure independent.
• ⚠️ Common mistake: using pro forma instead of actual expenses Seller-provided pro forma numbers often understate real operating costs — verify with actual historical statements when possible.

Frequently Asked Questions