Cap Rate Calculator
Free cap rate calculator. Compute the capitalization rate for a rental property from net operating income and purchase price. No signup.
What cap rate is
Capitalization rate — cap rate — is a rental property’s net operating income divided by its purchase price. It expresses the return a property produces before any mortgage, which makes two properties directly comparable regardless of how each buyer finances them. It is the number investors quote first when a listing is discussed.
How the calculator works
- Net operating income (NOI) = annual rental income − annual operating expenses.
- Cap rate = NOI ÷ purchase price × 100.
- Expense ratio = operating expenses ÷ rental income × 100, which shows how much of the rent is consumed by running the property.
A worked example
A property rents for $24,000 a year, costs $8,000 a year to operate, and is priced at $300,000:
| Step | Calculation | Result |
|---|---|---|
| Net operating income | 24,000 − 8,000 | $16,000/yr |
| Cap rate | 16,000 ÷ 300,000 | 5.33% |
| Expense ratio | 8,000 ÷ 24,000 | 33% |
At a 5.33% cap rate the property yields about $5.33 of net income a year for every $100 of price, before financing.
Reading a cap rate
| Cap rate | Usually means |
|---|---|
| 3–4% | Low risk, low yield; strong-appreciation markets |
| 4–6% | Common in higher-priced residential markets |
| 6–8% | Typical range for many residential rentals |
| 8%+ | Higher yield, usually higher risk or weaker market |
A higher cap rate is not automatically better. It can signal a distressed area, deferred maintenance, or unrealistic rent assumptions — the yield is compensation for something.
What cap rate leaves out
- The mortgage. Cap rate is unlevered. Once you borrow, the number that matters is cash-on-cash return.
- Capital expenditure. Roofs, HVAC, and renovations are not operating expenses in this calculation but they are real costs.
- Acquisition costs. Closing costs and fees raise your true basis above the listed price.
- Vacancy and credit loss. If the property is not fully let all year, actual income is lower than the headline rent.
Common mistakes
- Using gross rent instead of NOI. Cap rate uses income after operating expenses; dividing gross rent by price overstates the yield.
- Including the mortgage payment. Debt service is a financing cost and is deliberately excluded so properties can be compared before leverage.
- Forgetting vacancy. A realistic NOI allows for empty months and non-payment, not a perfect 12 months of rent.
- Comparing across property types. A 5% cap on a stable apartment block and a 5% cap on a single old house carry very different risk.
Cap rate vs cash-on-cash return
Cap rate assumes you buy outright. Once you borrow, the number that matters day to day is cash-on-cash return: annual pre-tax cash flow divided by the cash you actually put in. Put 20% down on the $300,000 example and the leverage magnifies both sides — the same $16,000 of net income now has to cover debt service before it becomes your return, so the cash-on-cash figure can be higher or lower than the 5.33% cap rate depending on the loan rate. Run the cap rate first to compare properties, then model the loan to see whether the leverage helps.
Frequently asked questions
Is cap rate the same as ROI?
No. Cap rate is a single-year, unlevered yield on the price. ROI measures total profit against total invested over the whole holding period, including financing and sale proceeds.
What is a good cap rate?
There is no universal answer. It depends on the market, the property type, and how much the buyer values stable income versus appreciation. Compare against similar properties in the same area, not a national average.
How does financing change the picture?
Borrowing can turn a 5% cap rate into a much higher — or negative — cash-on-cash return depending on the loan rate. Model the debt separately; the mortgage payoff calculator shows how extra payments change the cost of the loan itself.
Why did my cap rate change when nothing about the property did?
Because the price changed, or the income or expenses did. Cap rate is a snapshot of current numbers; a rent rise, a tax increase, or a new asking price moves it immediately.