Cap Rate Calculator
Work out the capitalization rate on an investment property. Enter the price, expected rent, vacancy allowance, and operating expenses to get the cap rate and net operating income.
How the cap rate is calculated
Cap rate = NOI ÷ property value × 100
First find net operating income (NOI): take the gross annual rent, subtract a vacancy allowance, then subtract yearly operating expenses such as property tax, insurance, maintenance, and management. Do not subtract mortgage payments. Then divide NOI by the property value to get the cap rate as a percentage.
Example
A $350,000 rental brings in $33,600 a year in rent. With a 5% vacancy allowance ($1,680) and $9,000 in operating expenses, NOI is about $22,920. Dividing by the $350,000 price gives a cap rate of roughly 6.5%.
Frequently asked questions
What is a cap rate?
The capitalization rate, or cap rate, is a property's net operating income (NOI) divided by its price or value, shown as a percentage. It estimates the annual return an investor would earn on an all-cash purchase, before financing. Cap rate = NOI ÷ property value × 100.
What is net operating income (NOI)?
NOI is the income a property produces after operating expenses but before mortgage payments and income tax. Start with gross rental income, subtract an allowance for vacancy, then subtract operating costs like property tax, insurance, maintenance, and management. NOI does not include loan payments.
What is a good cap rate?
It depends on the market and the risk. Many investors look for cap rates in the 5% to 10% range. A higher cap rate can mean higher return but often more risk or a weaker location, while a lower cap rate usually reflects a safer, higher-demand market. Compare against similar local properties.
Does cap rate include the mortgage?
No. Cap rate deliberately ignores financing so you can compare properties on equal footing. To measure the return on the cash you actually put in, including loan payments, investors use cash-on-cash return instead.