Cap Rate Calculator

What this calculator does

When investors size up a rental property, the first number most of them reach for is the cap rate. It answers a simple, powerful question in one figure: relative to what the property costs, how much income does it actually throw off? This calculator works that out for you. From the property value, the rent it brings in, and realistic allowances for expenses and empty units, it builds the property's net operating income and turns it into a cap rate.

What a cap rate is

The cap rate, short for capitalization rate, is the property's annual net operating income divided by its value, written as a percentage.

The cleanest way to think about it is this: the cap rate is the return the property would earn you if you bought it outright, in cash, with no mortgage involved. That is what makes it such a useful yardstick. Because it strips financing out of the picture entirely, it lets you compare two properties on the pure strength of the income they generate against their price, without the noise of how each deal happens to be funded.

Building the net operating income

A cap rate is only as honest as the income figure underneath it, so the real work is getting to net operating income, the NOI. You do not just take the rent at face value, because two things chip away at it before any profit is counted.

First is vacancy. No rental stays occupied every single day, so a slice of the gross rent never actually arrives, and a realistic figure accounts for that. Second are the operating expenses: the ongoing costs of running the place, things like maintenance, management, insurance, and taxes. The calculator starts from your gross income, trims it for the vacancy rate, then subtracts operating expenses, and what survives is the NOI, the genuine income the property produces before financing.

A worked example

Say a property is worth 500,000 and brings in 60,000 a year in gross rent. You allow 5% for vacancy and reckon operating expenses run at 35%.

After trimming for the 5% that sits empty and taking out the 35% in running costs, the net operating income comes to 37,050, with operating expenses totalling 19,950. Divide that 37,050 of income by the 500,000 price and you get a cap rate of 7.41%. In plain terms: if you bought this place in cash, it would earn you about 7.41% a year on the money, before any mortgage. That single figure is now something you can hold up against any other property you are weighing.

Reading a cap rate: high, low, and why

Once you have the number, the useful skill is knowing what it whispers about the deal. A higher cap rate means you are paying less for each pound of income, which often points to a cheaper property, a higher-risk area, or slower expected growth. A lower cap rate means you are paying more for that same income, which typically signals a pricier, lower-risk, or higher-growth location where buyers accept a smaller yield in exchange for stability.

So there is no single "good" cap rate in the abstract. It only means something in context, compared against similar properties in the same market. A 7% cap rate might be generous in one city and thin in another. The cap rate is a comparison tool first, and it does its best work when you line up like against like.

Cap rate versus cash on cash

It helps to know what the cap rate deliberately leaves out, because that is where its sister metric comes in. The cap rate ignores financing completely, treating every deal as an all-cash purchase. But most property is bought with a mortgage, and once you borrow, the return on the actual cash you put in can look very different.

That is what the cash on cash return measures, and the two are meant to be read together. The cap rate tells you what the property yields on its own; the cash on cash return tells you what your invested cash yields once the mortgage is in the mix. If you are running a deal with a loan, calculate both. Our cash on cash return calculator handles the financed side, and the mortgage calculator helps you pin down the loan payment that feeds into it.

How to use it

• Property value. The price or current market value of the property.
• Annual gross income. The full yearly rent before any deductions.
• Operating expenses. The running costs, entered as a percentage of the income after vacancy.
• Vacancy rate. The percentage of the year you expect the property to sit empty.

Press Calculate to see the total operating expenses, the net operating income, and the cap rate. Press Reset to clear it.

Questions people ask

What is a good cap rate?

There is no universal figure. A cap rate only means something next to comparable properties in the same market. Higher cap rates suggest cheaper or higher-risk properties, lower ones suggest pricier or lower-risk locations, so judge it in context rather than against a fixed target.

Does the cap rate include my mortgage?

No. The cap rate is deliberately unlevered, meaning it treats the property as an all-cash purchase and ignores financing. To see the return on the cash you actually invest once a mortgage is involved, use the cash on cash return.

How is net operating income calculated?

Start with gross rental income, reduce it for expected vacancy, then subtract operating expenses such as maintenance, management, insurance, and taxes. What remains is the net operating income, the figure the cap rate is based on.

References

The cap rate as net operating income divided by property value, and its nature as an unlevered return metric, follow Corporate Finance Institute and the standard real estate finance text by Geltner and Miller below.

1. Corporate Finance Institute. Capitalization Rate (Cap Rate). corporatefinanceinstitute.com
2. Geltner, D., et al. Commercial Real Estate Analysis and Investments. Cengage/OnCourse Learning.