Cap Rate Calculator
Calculate a property's cap rate from net operating income and value, with vacancy and operating-expense inputs, plus the implied value at a target cap rate.
Cap rate
Net operating income divided by the property value. A property-level yield that ignores financing.
5.26%
- Net operating income
Income after operating expenses, before the mortgage. Debt service and income tax are not included.
- $18,418.80
- Implied value at target cap rate
What the property would be worth to hit your target cap rate: NOI divided by that rate.
- $306,980.00
NOI build-up
| Item | Amount |
|---|---|
| Gross annual rent | $31,200.00 |
| Vacancy loss | -$1,560.00 |
| Operating expenses | -$11,221.20 |
| Net operating income | $18,418.80 |
Quick answer: With the example inputs this page loads by default, the headline result (Cap rate) comes to 5.26%. Calculate a property's cap rate from net operating income and value, with vacancy and operating-expense inputs, plus the implied value at a target cap rate. Change any input above and every figure updates instantly in your browser.
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A capitalization rate, or cap rate, is a property's annual net operating income (NOI) divided by its value or purchase price, shown as a percent. It measures the unlevered yield the property earns before any mortgage. This calculator builds NOI from your rent, vacancy, and operating costs, divides by the value to give the cap rate, and shows the implied value at a target cap rate.
What this result means
The cap rate is the property's unlevered yield: what it earns as a percent of its value before any mortgage, so it lets you compare deals on the property alone, independent of financing. There is no single good number. A cap rate is only meaningful against a market and a risk level. A low cap rate often signals a pricey, low-risk, high-demand market where buyers accept a smaller yield for stability and appreciation, not a bad deal; a high cap rate can reward you for taking on a weaker location, older building, or thinner tenant demand. As a rough orientation, many stabilized US rentals trade somewhere in the 5 to 8 percent range, but that band shifts with interest rates, property type, and metro, so treat it as context rather than a target. Read the cap rate together with cash flow and your own return on the cash you invest, since two identical cap rates can produce very different investor returns depending on the loan. This is an estimate for education, not financial advice.
Assumptions
- Gross annual rent is your monthly rent times 12. Effective gross income is that gross rent minus a vacancy allowance, the share of the year you assume the unit sits empty (a percent of gross rent).
- Operating expenses are property tax (a percent of the value), landlord insurance (a fixed amount), a maintenance reserve (a percent of the value), property management (a percent of the rent collected after vacancy), and HOA dues. Management at 0 percent means you self-manage. These mirror the rental ROI calculator's conventions and are held constant, not grown for inflation.
- Net operating income (NOI) is effective gross income minus operating expenses. By the standard definition NOI excludes debt service (your mortgage principal and interest) and income tax, so the cap rate is unlevered and independent of how you finance the deal. Each component is rounded to the nearest cent, so the NOI build-up reconciles to NOI exactly.
- Cap rate is NOI divided by the property value, shown as a percent. You choose the value basis: the purchase price to measure the deal at what you pay, or the current market value for an asset you already own. A zero value leaves the cap rate undefined (it is shown as not applicable rather than dividing by zero), and a negative NOI produces a negative cap rate, which is valid for a property losing money and is not clamped.
- The implied value at a target cap rate is NOI divided by that target rate, the price at which the deal would hit the yield you want. It is shown as not applicable when the target is zero. At a target above your current cap rate the implied value is below your entry value, and at a lower target it is above it.
- Not modeled: the mortgage and financing, income taxes and the depreciation tax shelter, capital expenditures beyond the maintenance reserve, and any growth in rent, expenses, or value over time. For financing, cash flow, and cash-on-cash return, use the rental property ROI or DSCR loan calculator.
- Results are estimates; rent, vacancy, expenses, and market cap rates all vary in the real world. This is an estimate for educational purposes only, not financial, legal, or tax advice. Consult a qualified professional for guidance specific to your situation.
Key terms
Definitions for the terms this calculator uses, in our finance glossary .
What a cap rate is and how it is calculated
A capitalization rate, or cap rate, is a property’s annual net operating income (NOI) divided by its value, shown as a percent. It measures the unlevered yield the property earns: the return before any mortgage. Because it ignores financing, the cap rate compares properties on the asset alone, no matter how each buyer pays for it. This calculator builds NOI from your rent and costs, divides by the value, and also solves the inverse: the value that would hit a target cap rate.
The NOI build-up
Start with gross annual rent, subtract a vacancy allowance, then subtract operating expenses:
gross annual rent = monthly rent x 12
effective gross income = gross annual rent - vacancy loss
NOI = effective gross income - operating expenses
Vacancy loss is a percent of gross rent. Operating expenses are property tax (a percent of value), landlord insurance (a fixed amount), a maintenance reserve (a percent of value), property management (a percent of the rent collected after vacancy), and HOA dues. These mirror the conventions in the rental property ROI calculator. Each component is rounded to the nearest cent, so the build-up reconciles to NOI exactly.
Why debt service is excluded
NOI stops before the mortgage. Debt service (loan principal and interest) and income tax are not operating expenses by the standard definition, so they are left out. That is the whole point of the cap rate: it measures the property’s own operating performance, which is the same no matter who owns it or how they finance it. Two investors can buy the same building at the same cap rate and earn very different returns on their own cash depending on their loans.
The cap rate and its inverse
cap rate = NOI / property value x 100
You choose the value basis: the purchase price to measure the deal at what you pay, or the current market value for an asset you already own. A zero value leaves the cap rate undefined (shown as not applicable rather than dividing by zero), and a negative NOI produces a negative cap rate, which is valid for a property losing money and is not clamped.
The inverse read turns a target yield into a price:
implied value = NOI / target cap rate
This is what the property would be worth to hit the yield you want at this NOI. At a target above your current cap rate the implied value is below your entry value, and at a lower target it is above it.
Worked example
Using the defaults: a $350,000 property value, $2,600 monthly rent, 5 percent vacancy, a 1.1 percent property tax rate, $1,500 insurance, 1 percent maintenance, 8 percent management, no HOA, and a 6 percent target cap rate.
- gross annual rent =
$2,600 x 12 = $31,200 - vacancy loss =
$31,200 x 5% = $1,560, so effective gross income =$29,640 - operating expenses =
$3,850 tax + $1,500 insurance + $3,500 maintenance + $2,371.20 management + $0 HOA = $11,221.20 - NOI =
$29,640 - $11,221.20 = $18,418.80 - cap rate =
$18,418.80 / $350,000 x 100 = 5.26% - implied value at a 6 percent target =
$18,418.80 / 0.06 = $306,980
So the property yields 5.26 percent at $350,000, and to reach a 6 percent cap rate at this NOI you would need to pay about $306,980 instead.
What is a good cap rate
There is no universal good number. A cap rate is only meaningful against a market and a risk level. Many stabilized US rentals trade roughly in the 5 to 8 percent range, but that band moves with interest rates, property type, and metro. A low cap rate often reflects a pricey, low-risk, high-demand area where buyers accept a smaller yield for stability and appreciation, not a bad deal; a high cap rate usually pays you for taking on a weaker location, an older building, or thinner tenant demand. Compare a cap rate to recent sales of similar properties in the same market, and read it together with cash flow and your return on invested cash rather than on its own.
What this includes and excludes
It includes the NOI build-up (gross rent, vacancy, and operating expenses) and the cap rate and its inverse. It excludes the mortgage and financing, income taxes and the depreciation tax shelter, capital expenditures beyond the maintenance reserve, and any growth in rent, expenses, or value over time. For financing, cash flow, and cash-on-cash return, use the rental property ROI or DSCR loan calculator. This is an estimate for education, not financial, legal, or tax advice.
Sources
- CFA Institute and standard real estate finance references, on the definition of net operating income (income after operating expenses, before debt service and income tax) and the direct capitalization method (value = NOI / cap rate).
- Consumer Financial Protection Bureau, background on rental property income and expenses, at consumerfinance.gov.
- CBRE and other commercial brokerage cap rate surveys, on how prevailing cap rates vary by market, property type, and the interest rate environment.
Frequently asked questions
- What is a cap rate?
- A capitalization rate, or cap rate, is a property's annual net operating income divided by its value or price, shown as a percent. It measures the unlevered yield the property earns, meaning the return before any mortgage. Because it ignores financing, the cap rate lets you compare properties on the asset alone, no matter how each buyer pays for it.
- How do I calculate a cap rate?
- First find net operating income (NOI): take the gross annual rent, subtract a vacancy allowance, then subtract operating expenses such as property tax, insurance, maintenance, management, and HOA. Do not subtract the mortgage. Then divide NOI by the property value or purchase price and multiply by 100. For example, an NOI of 18,000 on a 350,000 property is a cap rate of about 5.14 percent.
- What is a good cap rate?
- There is no single good cap rate; it depends on the market, the property type, and the risk. Many stabilized US rentals trade roughly in the 5 to 8 percent range, but that shifts with interest rates and the metro. A low cap rate often reflects a pricey, low-risk, high-demand area rather than a bad deal, while a high cap rate usually pays you for taking on more risk. Compare a cap rate to similar recent sales in the same market, not to a universal number.
- Does the cap rate include the mortgage?
- No. NOI, the top of the cap rate, is calculated before debt service, so the mortgage is not included. That is by design: the cap rate is meant to measure the property's own performance, which is the same no matter who owns it or how they finance it. To bring in the loan and see your own return on invested cash, use cash-on-cash return or the rental property ROI calculator instead.
- What does my result mean?
- The cap rate is the yield the property throws off relative to its value, before any loan. Read it against your local market: near the middle of the range for comparable properties is typical, a higher cap rate signals more income per dollar but usually more risk, and a lower one signals a pricier or safer asset. The implied value at your target cap rate tells you what you would need to pay to earn the yield you want at this NOI.
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By Sam Sage Last reviewed .