The capitalization rate — almost always shortened to "cap rate" — is the single most important number in commercial and rental real estate. It tells you, in one percentage, what a property earns as a yield on its value before you account for financing. A 6% cap on a building means that, ignoring your mortgage, the property's net operating income equals 6% of its price every year. That makes cap rate the standard tool for comparing apartments, duplexes, strip malls, and office buildings the way a buyer compares stocks by their dividend yield.
This cap rate calculator takes your purchase price, your annual rent, and your operating expenses, then computes your Net Operating Income (NOI), your cap rate, and — using the yield you require — the implied value of the property. Adjust any field and every result updates instantly, so you can stress-test whether a listing is cheap or expensive for your market.
How to Use
- Enter the Property Value / Purchase Price — either what the seller is asking or the current market value. This is the denominator of the cap rate.
- Type your Annual Gross Rental Income — the total rent the property collects in a year at market rates. Do not subtract vacancy yet if you would rather fold it into expenses.
- Fill in Annual Operating Expenses. This includes property taxes, insurance, maintenance, property management, landscaping, and any utilities you pay as the owner. It deliberately excludes your mortgage payment — debt service never enters NOI.
- Set a Target Cap Rate (optional). If you are shopping and want to know what price you would pay for this stream of income at your required yield, enter it here; the calculator backs out an implied value.
- Read the result card: NOI is the cash the building throws off before financing, Capitalization Rate is the headline yield, and Implied Value shows what the NOI is worth at your target cap.
A useful sanity check: if the resulting cap rate is far above the going rate for your market (often 5%–8% in Sun Belt metro areas, lower in coastal cities), the price may be unusually low — or the expenses and vacancy estimates may be too optimistic.
The Cap Rate Formula
The math is deliberately simple, which is exactly why it survives in real estate:
Cap Rate = NOI ÷ Property Value
where
NOI = Annual Gross Rental Income − Operating Expenses
Worked example: a $500,000 duplex collects $60,000 a year in rent and costs $15,000 a year in taxes, insurance, and maintenance. NOI is $60,000 − $15,000 = $45,000, and the cap rate is $45,000 ÷ $500,000 = 9.0%. That is a healthy yield, typical of a value-add or mid-tier market.
To go in reverse — estimating value from a desired yield — flip the formula:
Implied Value = NOI ÷ Target Cap Rate
If your required yield is 7%, the same $45,000 NOI is worth $45,000 ÷ 0.07 = $642,857. Paying less than that means your actual cap rate beats your target; paying more means you are accepting a lower yield than you wanted.
Two supporting ratios help you interpret the result: the Operating Expense Ratio (expenses ÷ rent) shows how much of every rent dollar leaks out the door, and the Gross Rent Multiplier (price ÷ annual rent) gives a quick back-of-envelope comparison across similar buildings.
What Does and Does Not Go Into NOI
This trips up new investors constantly. NOI is built on the income a property generates for an all-cash buyer, so:
- Include property taxes, insurance, repairs, management fees, advertising, landscaping, and HOA dues paid by the owner.
- Include a vacancy reserve (commonly 5%–10% of gross rent) to smooth out empty months.
- Exclude your mortgage principal and interest. That is a financing decision, not a property-level expense — and it is why two buyers can buy the exact same building and get wildly different cash-on-cash returns while sharing the same cap rate.
- Exclude depreciation and other non-cash tax write-offs.
Examples
Example 1 — A balanced duplex. You offer $500,000 on a small triplex that rents for $60,000 a year, with $15,000 in annual expenses. NOI is $45,000, the cap rate is 9.0%, and at a 7% target the implied value is about $642,857 — meaning the building looks cheap relative to your required yield.
Example 2 — A near-zero-expense rental. A newer condo has minimal maintenance: $40,000 rent against $0 in expenses (the HOA covers most everything). NOI is $40,000; on a $500,000 price the cap rate is 8.0%, and the implied value at a 7% target is about $571,429.
Example 3 — A million-dollar apartment building. A 12-unit property listed at $2,000,000 brings in $240,000 in rent and runs $60,000 in expenses. NOI is $180,000, the cap rate is 9.0%, and at a 6% target yield the implied value is $3,000,000 — a wide gap that suggests either a distressed sale or an expense estimate worth double-checking.
FAQ
What is a good cap rate for rental property?
There is no universal number, but most investors expect 5%–10% for stabilized residential rentals, with higher rates in secondary and tertiary markets and lower rates in expensive coastal cities. A cap rate above 10% usually signals higher perceived risk — older building, weaker tenants, or a declining area. Compare properties in the same submarket rather than shopping a national average.
Does cap rate include the mortgage?
No. Cap rate and NOI deliberately ignore debt service. The mortgage is how you choose to pay for the building; the cap rate describes what the building itself earns. After you add a loan, your cash-on-cash return can be higher or lower than the cap rate depending on your interest rate and down payment.
What is the difference between cap rate and cash-on-cash return?
Cap rate = NOI ÷ property value, and it is identical for every buyer. Cash-on-cash = annual cash flow after debt service ÷ the cash you actually invested (usually the down payment plus closing costs). Because two buyers finance the same building differently, their cash-on-cash returns diverge while the cap rate stays the same.
How does vacancy affect cap rate?
Treat vacancy as an expense. Subtract 5%–10% of gross rent (more for transient or Class C properties) before computing NOI. A "10% cap" built on 100% occupancy fantasy often collapses to a 6% cap once a single unit sits empty for a few months.
Why does my cap rate differ from the listing's?
Listing brokers routinely quote cap rates on gross rent without vacancy reserve, management fees, or repairs. Build your own NOI from realistic expenses; the broker's number is a marketing figure, not an audited one. A 10% broker cap that shrinks to 6% under your own assumptions is the norm, not the exception.
Can cap rate be negative?
Only when operating expenses exceed rental income — meaning the building loses money every year. A negative cap rate is a serious warning sign; unless you are buying for appreciation or a forced rent raise, you should walk away. This calculator rejects a non-positive property price rather than producing a nonsense yield.
Disclaimer
This cap rate calculator is provided for informational purposes only and does not constitute financial, real estate, tax, or investment advice. NOI, cap rate, and implied value estimates depend entirely on the rent and expense figures you enter; actual operating costs, vacancy, market yields, and property values vary by location and change over time. Always verify figures with a licensed real estate professional, property manager, or accountant before making an investment decision.