Cap Rate Calculator

Cap Rate Calculator

Find a rental property’s capitalization rate from its net operating income and value in seconds.

Quick Answer

Cap rate (short for capitalization rate) is calculated by dividing a property’s Net Operating Income (NOI) by its current market value or purchase price, then expressed as a percentage: Cap Rate = NOI ÷ Property Value × 100. Enter your property value and annual NOI into the calculator above to get your cap rate and NOI multiple instantly.

If you’re comparing rental properties, a syndication deal, or your own current holdings, cap rate is one of the fastest ways to see how much income a property generates relative to what it’s worth. It’s useful for real estate investors sizing up a new purchase, landlords checking how a property is performing, and homebuyers who are looking at a property partly as a rental investment.

Enter your property’s value (or purchase price) and its annual Net Operating Income into the calculator above, and it will return your cap rate along with the NOI multiple – the inverse relationship between price and income. Cap rate is generally calculated by dividing Net Operating Income by the property’s current market value or purchase price, then expressing the result as a percentage.

What Is a Cap Rate?

A cap rate measures the annual return a property would generate if purchased in cash, based purely on its operating income relative to its value. It strips financing out of the picture entirely, which is exactly why investors use it: it lets you compare two very different properties, with two very different mortgages (or no mortgage at all), on the same basis.

Cap rate reflects a property’s income-producing potential – how efficiently it converts its market value into income, before anything related to how it was purchased. It’s expressed as a percentage because that makes it easy to compare across properties of very different sizes and price points: a $150,000 duplex and a $5 million apartment complex can both be described with a single cap rate number.

One important distinction: cap rate is not the same as a property’s total investment return. It doesn’t capture appreciation, financing costs, or principal paydown – it’s a snapshot of operating performance at a single point in time, not a complete picture of what an investor will actually earn.

Simple example: A small rental property is valued at $300,000 and generates $18,000 a year in NOI. Its cap rate is $18,000 ÷ $300,000 × 100 = 6%. That 6% describes the property’s unlevered income yield – what it would return annually if you bought it outright with cash, before taxes.

How to Use the Cap Rate Calculator

This calculator asks for two numbers:

Note: This calculator takes NOI as a single number rather than breaking out gross income and each expense line item separately, so the income-minus-expenses math happens before you enter your figures here.

Once you enter both values, the calculator returns your Cap Rate (NOI divided by property value, as a percentage) and your NOI Multiple (property value divided by NOI) – the second number shows roughly how many years of NOI it would take to equal the property’s value, which some investors use as a quick sanity check alongside the cap rate itself.

Cap Rate Formula

Cap Rate = Net Operating Income ÷ Property Value × 100

Net Operating Income (NOI) – the property’s annual income after subtracting normal operating expenses, but before mortgage payments.

Property Value – the current market value or purchase price of the property.

× 100 – converts the result into a percentage, which is the conventional way cap rate is expressed.

Net Operating Income (NOI)

NOI generally represents a property’s income minus its normal operating expenses. Common operating expenses that reduce NOI include:

NOI generally does not include mortgage principal and interest, because cap rate is designed to evaluate a property’s operating performance independently of how it’s financed – that’s what makes it useful for comparing properties with different loans, or no loan at all. That said, treatment of certain expenses, like capital improvements or owner-performed labor, can vary depending on the analysis, so it’s worth being consistent in how you calculate NOI across properties you’re comparing.

Cap Rate Calculation Example

Hypothetical example only. Illustrative figures, not an actual property or market data.

The math: $24,000 ÷ $400,000 × 100 = 6%. In practical terms, this means the property generates income equal to 6% of its value each year, based purely on operations, with no financing factored in. Whether that 6% is attractive depends on the market, the property type, and what else is available to compare it against – which is exactly what the next section covers.

Calculate Your Own Property’s Cap Rate

Enter your property value and NOI above to see your cap rate and NOI multiple instantly.

What Is a Good Cap Rate?

There’s no single cap rate that’s universally considered “good” – what looks attractive in one market or for one property type can look very different in another. A number of factors influence what a reasonable cap rate looks like for a given deal:

Rather than relying on a universal benchmark, it generally makes more sense to compare a property’s cap rate with similar properties in the same market and of a similar type and condition. A cap rate that looks low in one context might be entirely normal in another.

What Does a Higher or Lower Cap Rate Mean?

Higher Cap Rate

A higher cap rate can indicate a higher income yield relative to the property’s value – meaning the property generates more income for every dollar it’s worth. At the same time, a higher cap rate may also be associated with greater perceived risk, slower expected appreciation, a less desirable location, or a property that needs more hands-on management.

Lower Cap Rate

A lower cap rate can show up in markets or properties where investors are willing to accept lower current income relative to value, often because of factors like a strong location, perceived stability, lower risk, or expectations of future appreciation.

Important: Cap rate alone doesn’t determine whether an investment is attractive. A higher cap rate isn’t automatically a better deal, and a lower cap rate isn’t automatically a worse one – both need to be weighed against risk, growth expectations, and the investor’s own strategy.

What Is Net Operating Income (NOI)?

Net Operating Income is what’s left of a property’s income after subtracting its normal operating expenses – before accounting for financing, taxes, or capital expenditures. It’s the foundation of the cap rate calculation.

NOI = Property Income − Operating Expenses

Property income typically includes gross rental income plus any other property-related income, such as parking, laundry, or storage fees.

Operating expenses typically include property taxes, insurance, repairs and maintenance, property management, owner-paid utilities, and similar ordinary costs of running the property.

NOI is often confused with other financial terms, so here’s how it’s distinct from each:

Cap Rate vs. Cash-on-Cash Return

Cap rate and cash-on-cash return both measure income relative to a dollar figure, but they’re not interchangeable:

Cap rate uses the full property value and ignores how it’s financed, which is why investors use it to compare properties on a level playing field. Cash-on-cash return, on the other hand, looks specifically at the actual cash an investor put in (like a down payment) and the cash flow left over after mortgage payments – so it directly reflects the impact of financing. Investors often use cap rate to screen and compare deals early on, then use cash-on-cash return once they’re evaluating a specific financing scenario for a specific property.

Example: A $400,000 property with $24,000 in NOI has a 6% cap rate. If an investor buys it with a $100,000 down payment and $300,000 financed, and hypothetical annual mortgage payments come to $19,200, the remaining cash flow is $24,000 − $19,200 = $4,800. Cash-on-cash return = $4,800 ÷ $100,000 × 100 = 4.8%. The same property shows two different percentages depending on which metric you use, because one ignores financing and the other is built around it.

Cap Rate vs. ROI

Cap rate is primarily an operating-income valuation metric – it tells you how a property performs based on its NOI and value, independent of everything else. Return on Investment (ROI) is a broader concept that can account for a much wider set of factors, including:

Because ROI can incorporate so many more variables, two investors looking at the exact same property with the same cap rate could calculate very different ROI figures depending on their financing, holding period, and exit assumptions. Cap rate is a quick, standardized snapshot; ROI is a more complete (and more variable) picture of an investor’s actual return.

For a deeper look at return calculations, see our ROI Calculator or the broader Investment Calculator.

Cap Rate vs. Gross Rent Multiplier (GRM)

Gross Rent Multiplier (GRM) is a quick valuation ratio that compares a property’s price to its gross annual rental income – no expenses involved at all.

GRM = Property Price ÷ Gross Annual Rental Income

The key difference is that GRM uses gross rental income, while cap rate uses NOI, which already has operating expenses subtracted out. That makes GRM faster to calculate but less precise – two properties with the same GRM could have very different expense loads, and therefore very different cap rates. Using the $400,000 property and $36,000 in annual rent from the example above: GRM = $400,000 ÷ $36,000 = 11.11. GRM is often used as a rough first-pass screening tool before digging into a full cap rate analysis.

What Expenses Are Included in Cap Rate?

These are common operating expenses that typically reduce NOI, and therefore factor into the cap rate:

Exactly which expenses apply – and how they’re categorized – can vary depending on the property type and the specific analysis being done, so it’s worth being consistent in how you calculate expenses across properties you’re comparing.

What Expenses Are Not Included in Cap Rate?

Certain costs are generally excluded from NOI (and therefore from the cap rate calculation), because cap rate is meant to reflect operating performance, not an individual owner’s financing or tax situation:

It’s worth distinguishing a standard NOI/cap rate calculation from more detailed investment underwriting. In practice, investors often separately account for capital expenditures and maintenance reserves when evaluating a property’s actual cash flow, even though those items typically sit outside the basic cap rate formula.

How to Calculate Cap Rate on a Rental Property

Worked example: A property generates $38,000 in gross annual rent. After a 5% vacancy allowance ($1,900), effective income is $36,100. Operating expenses total $12,100, leaving an NOI of $24,000. On a $400,000 property, that’s $24,000 ÷ $400,000 × 100 = 6% cap rate.

Limitations of Cap Rate

Cap rate is a useful screening tool, but it shouldn’t be the only metric an investor relies on. Some of its limitations:

Because of these limitations, it generally makes sense to evaluate cap rate alongside other metrics – cash flow, cash-on-cash return, debt service coverage ratio, vacancy assumptions, financing costs, and other underwriting factors – rather than relying on it in isolation.

Frequently Asked Questions

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