Cap Rate Calculator

What Is Cap Rate?

The capitalization rate, commonly known as cap rate, measures a property’s expected annual return assuming an all-cash purchase with no financing. It isolates the property’s income performance from how the investor chooses to pay for it.

Cap rate is the most widely used metric among commercial real estate investors and analysts for comparing properties. By removing financing from the equation, it provides a standardized benchmark: two investors evaluating the same property will calculate the same cap rate regardless of their individual loan terms.

The cap rate calculator above computes this metric from your property details, showing both the rate and the underlying net operating income (NOI) breakdown.

Cap Rate Formula

The formula is:

Cap Rate = Net Operating Income (NOI) / Property Price

NOI is calculated as:

NOI = Annual Rental Income - Vacancy - Operating Expenses

Operating expenses include property taxes, insurance, maintenance, and property management. NOI does not include mortgage payments — that is intentional.

For a property priced at $300,000 with $2,000 monthly rent ($24,000 annually), 5% vacancy ($1,200), and $7,800 in annual operating expenses:

NOI = $24,000 - $1,200 - $7,800 = $15,000

Cap Rate = $15,000 / $300,000 = 5.0%

Note that cap rate uses rental income only. Additional income sources like parking or laundry are not included in the cap rate calculation. Enter your numbers above to calculate instantly.

How to Calculate Cap Rate

Step 1: Determine annual rental income. Multiply the monthly rent by 12. Use the current market rent for accurate results — you can verify with comparable listings in the area.

Step 2: Subtract vacancy. A 5% vacancy rate is a common starting point, representing roughly 2.5 weeks of vacancy per year for tenant turnover.

Step 3: Subtract operating expenses. These include:

• Property taxes — check the listing or county assessor’s website
• Insurance — get a quote or use the annual estimate
• Maintenance — typically 1% to 2% of property value annually
• Property management — 8% to 10% of collected rent if using a manager

The calculator offers a quick mode using an expense ratio (a single percentage of rental income) and a detailed mode where you itemize each expense. Detailed mode produces more accurate results.

Step 4: Divide NOI by the property price. The result is your cap rate as a decimal — multiply by 100 for the percentage.

What Is a Good Cap Rate?

Cap rates are market-relative. The same property in different locations carries different cap rates because property prices vary independently of rental income. Here are typical ranges across US markets:

A property in Indianapolis at an 8% cap rate is not inherently “better” than one in San Diego at 4%. The Indianapolis property generates more income relative to price, but the San Diego property may appreciate faster. Your investment strategy determines which cap rate range fits your goals.

The calculator’s benchmark comparison shows how your property’s cap rate stacks up against market averages, giving you context for your specific situation.

Cap Rate vs Rental Yield

Both cap rate and rental yield use the property price as the denominator, but they differ in the numerator:

Gross rental yield uses total annual rental income before any expenses are deducted. It is the simplest measure of a property’s income relative to its price.

Cap rate uses net operating income (NOI), which subtracts vacancy and operating expenses from rental income. It provides a more realistic picture of the property’s earning power after the costs of ownership.

For a property with low expenses, the two metrics are close. As expenses increase, cap rate drops further below gross yield. This gap reveals the true cost structure of the property.

When evaluating a recent purchase, net rental yield and cap rate produce the same number since the denominator (price) is the same. They diverge over time as the property appreciates — yield stays anchored to purchase price while cap rate may be recalculated against market value.

Calculate your rental yield →

Calculate your cash-on-cash return →

Limitations

Cap rate is a valuable screening tool, but it has constraints:

• Static snapshot — it reflects current income and price but does not account for future rent growth or property value changes.
• Expense variability — operating expenses vary widely between properties. Quick-mode estimates using an expense ratio may not match actual costs.
• No financing impact — by design, cap rate ignores leverage. An investor using favorable financing may earn significantly more than the cap rate suggests.
• No capital expenditures — major repairs and renovations are not included in the standard NOI calculation.

Cap rate works best for initial property comparison and screening. For a complete picture that includes financing, use cash-on-cash return alongside cap rate.

Frequently Asked Questions

What is a good cap rate for rental property?

Cap rates are market-relative, so there is no universal target. In Midwest cash-flow markets, 8% and above is common. The national average sits around 6% to 8%. Coastal and gateway cities typically range from 4% to 6%, while expensive metro areas may fall below 4%. Use the cap rate calculator above to see how your property compares to market benchmarks.

Is a higher cap rate better?

A higher cap rate means more income relative to the property price, but it often comes with higher risk. Properties in less desirable areas, older buildings, or markets with declining populations tend to have higher cap rates. Lower cap rates typically reflect more stable, appreciating markets. The best cap rate depends on your investment strategy.

What is the difference between cap rate and ROI?

Cap rate is an unlevered metric that excludes financing — it shows the property’s return as if you paid all cash. ROI often includes financing, appreciation, equity buildup, and tax benefits. Cap rate isolates the property’s income performance from your personal financial decisions.

Does cap rate include mortgage payments?

No. Cap rate is a pre-financing metric calculated as NOI divided by property price. It intentionally excludes mortgage payments so you can compare properties regardless of how each is financed. For a return metric that includes financing, use cash-on-cash return.

Why do investors use cap rate?

Cap rate allows apples-to-apples comparison between properties regardless of financing. Two investors looking at the same property may have different loan terms, but the cap rate is identical for both. It strips out leverage to isolate the property’s fundamental income-producing ability.

What cap rate do investors look for?

It varies by strategy. Cash-flow investors often seek 8% or higher, targeting markets where income relative to price is strong. Value-add investors may accept 4% to 6% if they can improve the property through renovations and rent increases. The sensitivity table above shows how expense changes affect your cap rate.