Cap Rate Calculator
Find the capitalization rate of a rental property from its price, rent, vacancy and operating expenses, with net operating income.
Results
| Item | Value |
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Quick Answer
Cap rate = net operating income ÷ property price × 100. A $300,000 rental bringing in $2,500 a month, with 5% vacancy and $9,000 of yearly expenses, has a net operating income of $19,500 and a cap rate of 6.50%.
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Table of Contents
- Cap Rate Calculator
- Quick Answer
- Related Calculators
- How This Cap Rate Calculator Works
- How to Use the Cap Rate Calculator
- Core Formulas
- Key Terms
- Worked Example
- Real-Life Examples
- Cap Rate vs Cash-on-Cash Return
- Cap Rate by Price and NOI
- What Moves Cap Rates
- Common Mistakes to Avoid
- Frequently Asked Questions
- References & Sources
How This Cap Rate Calculator Works
The capitalization rate shows the yearly return a property earns before financing, as a share of its price. Enter the price, the monthly rent from all units, the expected vacancy and the yearly running costs. The calculator works out net operating income and divides it by the price.
Quick explanation: cap rate = NOI ÷ price × 100.
- NOI: rent after vacancy, minus operating expenses.
- Before financing: mortgage payments are not included.
- Target cap rate: shows the price that would give that return.
How to Use the Cap Rate Calculator
- Enter the purchase price or current value of the property.
- Enter the total monthly rent from all units.
- Enter an expected vacancy rate. 5% to 10% is a common planning range.
- Enter yearly operating expenses, not including the mortgage.
- Optionally, enter a target cap rate to see the price that would meet it, then press Calculate.
Core Formulas
- Gross rent: monthly rent × 12
- Effective income: gross rent × (1 − vacancy rate)
- NOI: effective income − operating expenses
- Cap rate: NOI ÷ price × 100
- Value at a target: NOI ÷ target cap rate
Key Terms
- Cap rate: net operating income as a percentage of a property’s price.
- NOI: net operating income: rental income after vacancy, minus operating expenses.
- Operating expenses: running costs such as tax, insurance, repairs and management.
- Vacancy rate: the share of time or units expected to be empty.
Worked Example
A fourplex costs $850,000 and rents for $7,200 a month in total. Vacancy is 6% and expenses are $28,000 a year.
- Gross rent = $86,400
- After vacancy = $81,216
- NOI = $81,216 − $28,000 = $53,216
- Cap rate = 6.26%
Real-Life Examples
- Comparing listings: property A at $300,000 with $19,500 NOI is 6.50%. Property B at $400,000 with $26,000 NOI is 6.50%. B costs more but A earns more per dollar.
- Setting an offer: if you want a 7% cap rate on $19,500 of NOI, pay no more than about $278,571.
- Raising rent: a $100 monthly rise adds $1,140 of NOI after 5% vacancy, lifting the cap rate on a $300,000 property by about 0.38 points.
- Cutting costs: switching to a cheaper insurance policy that saves $1,200 a year raises NOI by $1,200 and the cap rate by 0.40 points on the same property.
Cap Rate vs Cash-on-Cash Return
- Cap rate: NOI ÷ price. Ignores the mortgage, so it compares properties fairly.
- Cash-on-cash return: yearly cash flow after the mortgage ÷ cash you invested. Shows your own return with financing.
- ROI: includes the gain from selling, not just yearly income. Try our ROI Calculator.
Cap Rate by Price and NOI
| Price | NOI $15,000 | NOI $20,000 | NOI $30,000 |
|---|---|---|---|
| $200,000 | 7.50% | 10.00% | 15.00% |
| $250,000 | 6.00% | 8.00% | 12.00% |
| $300,000 | 5.00% | 6.67% | 10.00% |
| $400,000 | 3.75% | 5.00% | 7.50% |
| $500,000 | 3.00% | 4.00% | 6.00% |
| $750,000 | 2.00% | 2.67% | 4.00% |
What Moves Cap Rates
- Location: busy, in-demand areas often have lower cap rates and higher prices.
- Property type: apartments, offices and retail each trade at different rates.
- Interest rates: higher borrowing costs often push cap rates up.
- Risk: older buildings or weaker tenants usually need a higher cap rate.
Common Mistakes to Avoid
- Including the mortgage in expenses. Cap rate uses NOI before financing.
- Ignoring vacancy. Few rentals stay 100% full all year.
- Underestimating repairs. Set money aside for roofs, heating and appliances.
- Using the seller’s numbers only. Check real tax bills, insurance quotes and rents.
- Comparing different markets. A good cap rate in one city may be poor in another.
Frequently Asked Questions
Divide net operating income by the property price and multiply by 100.
It depends on the market and property type. Many investors look at a range of about 4% to 10%, with higher rates usually meaning more risk.
No. It measures the property’s return before financing.
Property tax, insurance, repairs, maintenance, management, utilities you pay and similar costs. Not mortgage payments or big upgrades.
It means more income per dollar, but often comes with more risk or a weaker location.
Divide NOI by the cap rate. $20,000 of NOI at a 6% cap rate is about $333,333.
Gross yield uses rent before vacancy and expenses. Cap rate uses net operating income, so it is lower and closer to the real return.
Yes. Property tax is an operating expense and is subtracted to find NOI.
Yes, if expenses are higher than the rent you collect. That means the property loses money before financing.
Cap rate ignores it. With a loan, your cash-on-cash return can be higher or lower depending on the rate and the amount borrowed.
Use purchase price when buying. Use current market value to see your return today.
References & Sources
| Source | Used For | Link |
|---|---|---|
| Investopedia, Capitalization rate | Cap rate definition. | https://www.investopedia.com/terms/c/capitalizationrate.asp |
| Wikipedia, Capitalization rate | Cap rate formula and use. | https://en.wikipedia.org/wiki/Capitalization_rate |