Cap Rate Calculator
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The cap rate is a property’s net operating income (NOI) as a percent of its price: cap rate = NOI ÷ value × 100. A $400,000 rental with $22,200 of NOI has a 5.55% cap rate.
Property tax, insurance, repairs, management, utilities you pay. Not mortgage payments.
| Income | |
| Gross potential income | $36,000 |
| Vacancy and credit loss | -$1,800 |
| Effective gross income | $34,200 |
| Operating expenses | -$12,000 |
| Net operating income (NOI) | $22,200 |
| Expense ratio | 35.1% |
| Return | |
| Cap rate | 5.55% |
| Gross rent multiplier | 11.11 |
| Monthly NOI | $1,850 |
Show steps
- Gross income = $3,000 × 12 + $0 = $36,000.
- Less 5% vacancy: $34,200.
- NOI = $34,200 − $12,000 = $22,200.
- Cap rate = $22,200 ÷ $400,000 × 100 = 5.55%.
How to use the cap rate calculator
- Choose whether to find the cap rate or the value.
- Enter the rent, any other income and a vacancy allowance.
- Enter yearly operating expenses: property tax, insurance, repairs, management, and owner-paid utilities. Leave out mortgage payments and big one-time improvements.
- Press Calculate.
Cap rate formula
- NOI = gross income − vacancy − operating expenses
- Cap rate = NOI ÷ property value × 100
- Value = NOI ÷ cap rate
Example: rent $3,000 a month is $36,000 a year. Less 5% vacancy is $34,200. Less $12,000 of expenses gives an NOI of $22,200. At a price of $400,000, the cap rate is 22,200 ÷ 400,000 = 5.55%.
Cap rate and value move in opposite directions
| NOI | Cap rate | Value |
|---|---|---|
| $22,200 | 4% | $555,000 |
| $22,200 | 5% | $444,000 |
| $22,200 | 6% | $370,000 |
| $22,200 | 8% | $277,500 |
For the same income, a lower cap rate means a higher price. Buyers accept lower cap rates for properties they see as safer, such as newer buildings in strong areas.
Limits of the cap rate
Cap rate is a one-year snapshot. It leaves out financing, rent growth, future repairs and the price you could sell for later. Compare it only between similar properties in similar markets, and look at cash flow, cash-on-cash return and total return before buying.
Cap rate practice questions
Test yourself with 6 multiple-choice questions. Choose an answer and press Submit to see if you are right and why. Your score appears at the end.
Quiz complete
Frequently asked questions
How do you calculate cap rate?
Divide the net operating income by the property's price or value and multiply by 100. NOI of $25,000 on a $500,000 property is a 5% cap rate.
What is a good cap rate?
It depends on the market, property type and risk. Lower cap rates are common in expensive, stable areas; higher cap rates usually come with more risk or less growth. Compare similar properties nearby.
Does cap rate include the mortgage?
No. Cap rate uses NOI before any loan payments, so it shows the return as if the property were bought with cash.
What is the difference between cap rate and cash-on-cash return?
Cap rate is NOI ÷ price. Cash-on-cash return is yearly cash flow after loan payments ÷ the cash you put in, so it changes with how you finance the purchase.
Sources
- Appraisal Institute: The Appraisal of Real Estate (income capitalization approach)
- U.S. Securities and Exchange Commission: Real estate investment trusts (REITs) investor bulletin
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