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Cap Rate Calculator

Finance & Investment

Calculate the capitalization rate for any rental property. Enter property value, gross rent, vacancy, and annual expenses to instantly see NOI and gross yield.

Property Value
$
Gross Annual Rent
$
Vacancy Rate
%
Annual Operating Expenses
$

Cap Rate

0.00%

No return
Net Operating Income (NOI)$0
Effective Gross Rent$0
Gross Rental Yield0.00%

US Market Benchmarks

Class A urban3–5%
Suburban residential5–7%
High-yield / B class7–10%

Cap rate measures return as if the property were purchased in cash — it excludes mortgage financing. Use it to compare properties or markets regardless of how they are funded.

What is a Cap Rate?

A Cap Rate Calculator computes the capitalization rate of an investment property — the ratio of its annual net operating income (NOI) to its current market value, expressed as a percentage. Cap rate is the single most important metric in commercial and residential investment real estate for comparing properties across different markets, financing structures, and deal types.

The capitalization rate formula is straightforward: Cap Rate = NOI / Property Value × 100. What makes it powerful is what it excludes — the mortgage payment. By removing financing from the equation, cap rate measures a property's intrinsic income-generating ability independent of how it is purchased. A property with a $50,000 annual NOI and a $1,000,000 value has a 5% cap rate whether the buyer pays cash, puts 25% down, or finances 90%. This makes it a genuinely comparable metric across deals.

Net operating income is gross annual rent minus vacancy losses, minus all operating expenses except the mortgage. Operating expenses include property taxes, insurance, maintenance, and property management fees. Vacancy loss accounts for periods when the unit is empty or rent is not collected. The result is the actual income the property produces as a business — what it earns, not what it earns after debt payments.

Understanding cap rate is foundational before analyzing any specific deal with leverage. If the cap rate on a property is 5% and your mortgage rate is 7%, financing the deal introduces negative leverage — debt costs more than the property earns, dragging down your cash-on-cash return. If your mortgage rate is 4%, financing amplifies returns positively. For the full leveraged return analysis, use the Rental Property ROI Calculator alongside this tool.

Cap rates also serve as a valuation shorthand. If comparable properties in your market trade at a 6% cap rate and the seller's asking price implies a 4.5% cap rate, you have a data-backed case for a lower offer — or a clear signal to walk away.

How to use this Cap Rate calculator

  1. Enter the Property Value — use the purchase price for a property you are analyzing, or the current estimated market value for a property you already own. For properties under contract, use the contract price. The cap rate is sensitive to this input — overestimating property value understates the cap rate and makes the deal look weaker than it is.

  2. Enter Gross Annual Rent — the total annual rent if the property were 100% occupied for all 12 months. For a single-family home at $2,500/month, this is $30,000. For multi-unit properties, add all units at full occupancy.

  3. Set the Vacancy Rate — enter your estimated vacancy as a percentage. The calculator deducts this from gross rent to compute effective gross income. Use 5% for a strong rental market, 8–10% for a typical market, or 12–15% for a softer or higher-turnover market.

  4. Enter Annual Operating Expenses — include property taxes, insurance, property management, maintenance and repairs, and any other recurring operating costs. Exclude mortgage payments and depreciation. If you do not have actual figures, a common estimate for single-family homes is 40–50% of effective gross rent (the "50% rule" of thumb).

  5. Read the cap rate and benchmark — compare your result against the US market benchmarks in the results panel. If your cap rate is below market comps, consider whether the asking price can be negotiated down or whether this is a low-yield market where appreciation is the primary return driver.

Formula & Methodology

Effective Gross Rent:

Effective Gross Rent = Gross Annual Rent × (1 − Vacancy Rate / 100)

Net Operating Income (NOI):

NOI = Effective Gross Rent − Annual Operating Expenses

Cap Rate:

Cap Rate = (NOI / Property Value) × 100

Gross Rental Yield:

Gross Yield = (Gross Annual Rent / Property Value) × 100

Property Value from NOI (inverse use):

Implied Value = NOI / (Cap Rate / 100)

Worked example:

Property value: $400,000. Gross annual rent: $30,000 (two units at $1,250/month each). Vacancy rate: 8%. Annual operating expenses: $8,200 (property tax: $4,400 + insurance: $1,800 + maintenance: $1,200 + management 8%: $800).

Effective Gross Rent = $30,000 × (1 − 0.08) = $27,600

NOI = $27,600 − $8,200 = $19,400

Cap Rate = ($19,400 / $400,000) × 100 = 4.85%

Gross Yield = ($30,000 / $400,000) × 100 = 7.50%

At 4.85%, this property falls in the lower range of suburban residential cap rates. At current mortgage rates of ~7%, financing this deal would introduce negative leverage (cap rate below borrowing cost). A buyer seeking positive cash flow would need a larger down payment, a lower purchase price, or higher rents to improve the yield.

Key assumption: This calculator computes pre-tax, pre-financing returns. State and local taxes, depreciation deductions, interest expense deductions, and capital gains tax on eventual sale all affect the after-tax return. For a financed deal with full cash flow analysis, use the Rental Property ROI Calculator. Cap rate is the foundation metric — layering leverage and tax effects produces the complete investment picture.

For a fuller definition, see our glossary entry on Cap Rate.

Frequently Asked Questions

A Cap Rate Calculator computes the capitalization rate of an investment property — the ratio of a property's net operating income (NOI) to its market value, expressed as a percentage. It gives you a financing-neutral measure of a property's income-generating potential, allowing you to compare properties across different markets and financing structures on an apples-to-apples basis.
Cap rate tells you how much annual income a property generates relative to its purchase price, assuming you paid cash with no mortgage. A 6% cap rate means you would earn $6 for every $100 of property value in annual net operating income. It measures the property's intrinsic earning power independent of how it is financed, making it the standard metric for comparing investment properties across different deal structures and markets.
A good cap rate depends heavily on the market. In high-demand urban markets (Manhattan, San Francisco, Los Angeles), cap rates of 3–5% are typical for Class A multifamily and commercial properties — investors accept lower yields in exchange for lower risk and higher appreciation potential. In suburban residential markets, 5–7% is common. In smaller cities or B and C class properties in the Midwest and South, cap rates of 7–10% or higher are achievable. There is no universally good or bad cap rate — it must be evaluated in local market context.
Net Operating Income equals effective gross income minus all operating expenses, where effective gross income is gross annual rent minus vacancy losses. Operating expenses include property taxes, insurance, property management fees, maintenance, and utilities paid by the owner — but explicitly exclude mortgage principal and interest, depreciation, and income taxes. Because NOI excludes the mortgage, cap rate is the same whether you paid cash or financed the property, making it a pure measure of property performance.
Gross yield is the simplest metric: annual gross rent divided by property value, with no deductions for vacancy or expenses. Cap rate is more rigorous — it divides net operating income (after vacancy and operating expenses) by property value. A property might show an 8% gross yield but only a 5% cap rate once you account for 8% vacancy, 1.5% property taxes, insurance, and management fees. Gross yield is useful for quick screening; cap rate is the standard for serious analysis and comparison.
Cap rate measures return on the full property value regardless of financing. Cash-on-cash return measures return on the cash you actually invested (your down payment). They are equal only if you pay all cash with no mortgage. With a mortgage, cash-on-cash return can be higher than the cap rate (when your mortgage rate is below the cap rate — positive leverage) or lower (when your mortgage rate exceeds the cap rate — negative leverage). Use cap rate to evaluate the property; use cash-on-cash return to evaluate your specific deal. For detailed cash-on-cash analysis, see the [Rental Property ROI Calculator](/rental-property-roi-calculator/).
Not necessarily. High cap rates often reflect higher risk — difficult tenant base, deferred maintenance, lower-quality location, or a market with lower appreciation prospects. Class A properties in stable, high-demand markets trade at low cap rates because investors accept lower current income in exchange for lower vacancy risk, better tenant quality, and higher long-term appreciation. A 4% cap rate on a well-located multifamily in Seattle may be a better risk-adjusted investment than a 10% cap rate on a Class C property in a distressed neighborhood.
Vacancy directly reduces effective gross income, which reduces NOI and therefore cap rate. A property with $30,000 in gross annual rent and 5% vacancy produces $28,500 in effective gross income; at 15% vacancy, effective gross income drops to $25,500. A higher vacancy assumption reduces the calculated cap rate, making the investment appear less attractive. Always stress-test your analysis with a higher vacancy rate (10–15%) to see how the cap rate changes under a more pessimistic scenario.
Yes — this is called the income capitalization approach and is used by commercial real estate appraisers. If you know the market cap rate for comparable properties and the property's NOI, you can estimate value: Value = NOI ÷ Cap Rate. For example, if similar buildings in the area trade at a 6% cap rate and your property's NOI is $60,000, the estimated value is $1,000,000. This is particularly useful when negotiating purchase price — if a seller's asking price implies a cap rate below market, you have a basis to negotiate.
The following expenses should be excluded from the NOI calculation: mortgage principal and interest, income taxes, depreciation, and capital expenditure reserves (though some analysts include CapEx reserves as a quasi-operating expense). Including the mortgage would make the cap rate financing-dependent, defeating its purpose. Depreciation is a non-cash accounting item. Including personal income taxes conflates the property's performance with the owner's tax situation. Some analysts also exclude capital expenditure reserves, though others argue for including them to reflect true economic costs.
Cap rate is the best single metric for cross-market comparison because it is financing-neutral. When comparing a duplex in Chicago at a 7% cap rate against a single-family rental in Nashville at a 6% cap rate, you can directly evaluate which property generates more income per dollar of value, independent of what mortgage each investor might get. Combine cap rate with local rent growth trends and appreciation history to build a full picture — a 6% cap rate in a market with 3% annual rent growth may outperform a 7% cap rate in a flat market over a 10-year hold.
Cap rates tend to move in the same direction as interest rates, though with a lag. When risk-free rates (like Treasury yields) rise, real estate investors demand higher returns to compensate for the additional risk of illiquidity and management, so cap rates expand (property values fall relative to income). When rates fall, cap rates compress (property values rise). The spread between cap rates and the 10-year Treasury yield — historically around 150–200 basis points — is one way investors assess whether real estate is fairly valued versus bonds.
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