Cap Rate Calculator
Calculate the capitalization rate of real estate investments. Determine NOI, property value, and estimated values at different cap rates.
Calculate cap rate and Net Operating Income (NOI) from property value and income. Also see estimated property values at standard cap rate benchmarks.
Formula
NOI = Gross Annual Income × (1 − Vacancy Rate) − Operating Expenses | Cap Rate = (NOI ÷ Property Value) × 100 | Estimated Property Value = NOI ÷ Target Cap Rate
Cap rate (capitalization rate) measures property profitability independent of how it is financed. NOI (Net Operating Income) is annual income after operating expenses but before debt service. Cap rate is the annual percentage return the property generates based on its income and value. The calculator also shows estimated property values at standard cap rate benchmarks to help compare against market prices.
Worked Example
$500,000 property with $60,000 annual gross income, 5% vacancy, $16,400 annual operating expenses.
Gross income (after 5% vacancy): $60,000 × (1 − 0.05) = $57,000
Operating expenses: $16,400
NOI: $57,000 − $16,400 = $40,600
Cap rate: ($40,600 ÷ $500,000) × 100 = 8.12%
At a 6% market cap rate, this property would be worth: $40,600 ÷ 0.06 = $676,667
If the market cap rate for similar properties is 6% but this property has an 8.12% cap rate, the property may be undervalued or riskier than comparable investments.
Frequently Asked Questions
Use this in your workflow
After calculating cap rate, use the Rental Property Calculator to analyze detailed returns, or the Property Yield Calculator to compare gross and net yields. Browse all Free Business Calculators.
When to use this calculator
- →Screening investment properties to identify acceptable yield thresholds
- →Comparing multiple properties in the same market on a yield basis
- →Estimating property value from known NOI and target cap rate
- →Understanding how property value relates to income generation
Common mistakes in cap rate analysis
Comparing cap rates across different markets or property types
A 5% cap rate is excellent in some markets and poor in others. Always compare properties within the same location and property type. Cross-market or cross-type comparisons are misleading.
Confusing cap rate with cash-on-cash return or IRR
Cap rate ignores financing costs and is property-specific, while cash-on-cash return accounts for debt service and your investment. IRR also factors time value and appreciation. These are complementary but distinct metrics.
Using gross rental income instead of NOI
Gross cap rate = Gross Income ÷ Value. True cap rate = NOI ÷ Value. Always use NOI (after expenses) for accurate comparisons. Gross cap rate inflates apparent returns by ignoring operating costs.
Including or excluding mortgage payments inconsistently
Cap rate always excludes debt service — it measures property yield independent of financing. If you include mortgage payments, you are calculating cash-on-cash return, not cap rate. Be clear which metric you are using.
Ignoring that higher cap rates often signal higher risk
A 10% cap rate sounds great compared to a 5% cap rate, but the difference often reflects risk: distressed property, weak location, tenant issues, or deferred maintenance. Understand why a cap rate is high before investing.
Disclaimer
Cap rate is one of many metrics used to evaluate real estate investments. It does not account for financing, appreciation potential, tax benefits, or risk. This calculator is for planning purposes only using your provided NOI and value estimates. Actual NOI depends on tenant quality, lease terms, and actual operating costs. This is not legal, tax, or financial advice. Consult a real estate professional before making investment decisions.
Frequently asked questions
What is a cap rate?
Cap rate (capitalization rate) measures property profitability independent of financing. Formula: Cap Rate = NOI ÷ Property Value × 100. A 6% cap rate on a $500,000 property means the property generates $30,000 annual NOI. Higher cap rates indicate higher yields but may signal higher risk or lower demand.
How is NOI calculated?
Net Operating Income (NOI) = Gross Rental Income − Operating Expenses. Operating expenses include property tax, insurance, maintenance, repairs, and management fees. NOI excludes mortgage payments, capital expenditures, and income tax. It represents the profit generated by the property itself, regardless of how it is financed.
What cap rate should I target?
Target cap rate depends on location, property type, and market conditions. Prime urban office: 3–5%. Secondary markets: 5–7%. Industrial: 4–6%. Retail: 5–8%. Higher cap rates (8%+) often indicate distressed properties or high-risk markets. Compare properties in your target market rather than across markets.
Why do cap rates vary between properties?
Cap rates vary because of location desirability, property condition, tenant quality, lease stability, and local market supply/demand. Premium properties in strong locations command lower cap rates. Risk, growth potential, and management quality also drive differences. Always compare cap rates within the same market.
How do I use cap rate for investment decisions?
Use cap rate to screen investment opportunities and compare properties. A property's cap rate indicates its current yield — but always evaluate cap rate alongside growth potential, tenant quality, maintenance requirements, and local market trends. Cap rate alone does not reveal whether a property is a good investment.