Cap Rate Calculator

The capitalization rate (cap rate) is the most widely used metric for evaluating income-producing real estate. It measures the annual return a property generates relative to its current market value, independent of financing.
That last part is what makes it useful: two buyers can compare the same building fairly even if one pays cash and the other borrows 80%.

Formula: Cap Rate = Net Operating Income (NOI) ÷ Current Property Value × 100 NOI = Gross Rental Income − Operating Expenses Property Value = NOI ÷ Cap Rate

What each variable means:

• Net Operating Income (NOI): annual income after operating expenses but before mortgage payments, income taxes, and depreciation.
• Operating Expenses: property taxes, insurance, property management, maintenance/repairs, vacancy allowance, utilities paid by owner.
• Cap Rate: expressed as a percentage; higher cap rate = higher return but often higher risk.

What is NOT included in NOI: Mortgage principal, mortgage interest, income tax, capital expenditures (roof replacement, HVAC), and depreciation are excluded. NOI is a pre-financing metric.

Cap rate benchmarks by market type:

Worked example: Single-family rental home. Purchase price: $280,000. Annual gross rent: $24,000 ($2,000/month) Vacancy (8%): −$1,920 Property tax: −$3,200 | Insurance: −$1,100 | Management (8%): −$1,920 | Maintenance: −$1,500

NOI = $24,000 − $1,920 − $3,200 − $1,100 − $1,920 − $1,500 = $14,360 Cap Rate = $14,360 ÷ $280,000 × 100 = 5.13%

Using cap rate to value a property: If comparable properties in the area sell at a 6% cap rate, this property’s fair value = $14,360 ÷ 0.06 = $239,333, which says the $280,000 asking price is about $41,000 above market.

To run this example through the calculator, enter a price of $280,000 and an NOI of $14,360. The chart then shows what that same $14,360 of income would be worth at every cap rate from 3% to 12%, with a dashed line at the asking price so you can see instantly which markets would justify it.

Cap rate vs. cash-on-cash return: Cap rate ignores financing. Cash-on-cash return measures the return on actual cash invested (down payment plus closing costs) after debt service, which is usually the more relevant number to a leveraged investor.