Cap Rate Calculator

This calculator is for informational purposes only. Always verify income, expense, and valuation figures with qualified professionals before making investment decisions.

What is a cap rate?

Capitalization rate (cap rate) is one of the most widely used metrics in commercial and residential investment real estate. It expresses a property's annual net operating income as a percentage of its value — giving you a quick, financing-neutral way to compare properties, gauge return potential, and back into a valuation.

Think of it as the yield you'd earn if you paid all cash for the property and had no debt service. Because mortgage payments are excluded, two investors with completely different financing can still use the same cap rate to compare properties on an equal footing.

You can also rearrange the formula to solve for either of the other two variables:

• Property Value = NOI ÷ Cap Rate (the income approach to valuation)
• NOI = Property Value × Cap Rate (useful for underwriting a target yield)

Worked examples

What goes into NOI — and what doesn't

Getting NOI right is the most important part of an accurate cap rate. Sellers and listing agents sometimes present "proforma" NOI using optimistic rents and no vacancy — always underwrite with your own numbers.

How to interpret your cap rate

Cap rate is most useful as a comparative tool, not an absolute one. A 5% cap rate might be excellent in downtown Los Angeles and mediocre in rural Ohio. Here's a rough framework:

• Below 4%: Common in major coastal metros and Class A properties. Investors are typically betting on appreciation and accept lower current yield.
• 4%–6%: Typical range for quality assets in large to mid-size secondary markets. Good balance of yield and risk for many long-term holds.
• 6%–8%: Solid income yield. Common in secondary and tertiary markets, older Class B/C properties, or value-add situations.
• Above 8–10%: Higher return but often higher risk — verify expenses, occupancy history, deferred maintenance, and local market trends before assuming the yield is real.

Always pull sold comps of similar properties and ask the listing agent for actual (not projected) rent rolls and trailing 12-month expense statements. The cap rate is only as good as the numbers behind it.

Cap rate vs. cash-on-cash return vs. GRM

Cap rate is powerful but it's not the whole story. Here's how it fits alongside two other common metrics:

Use cap rate to shortlist and compare. Use cash-on-cash return to decide whether your specific financing makes the deal work for you. Use GRM when you just need a fast filter before you've dug into expenses.

Common cap rate mistakes to avoid

• Using proforma rents instead of actual rents. Always underwrite to current, in-place rents unless you have a clear, costed plan to raise them.
• Forgetting vacancy. Even a great property has occasional turnover. A 5–7% vacancy allowance is standard on most residential rentals; adjust for local market conditions.
• Omitting management fees because you self-manage. If you plan to sell someday, your buyer will factor in management. Leaving it out inflates your NOI and makes your property look more valuable than it would appear to a passive investor.
• Ignoring CapEx. A new roof, HVAC, or appliances will come. While CapEx isn't in NOI, you need to budget for it separately — otherwise a high cap rate can become a cash-flow disaster after a big repair year.
• Comparing cap rates across different property types. A 6% cap on a single-family rental and a 6% cap on a self-storage facility represent very different risk profiles. Compare within asset classes.

For agents and loan officers: using cap rate in client conversations

If you work with investor clients — whether buyer's agents representing rental property purchasers or loan officers structuring DSCR loans — cap rate literacy gives you a real edge. Investors respect agents who can read a rent roll and speak in NOI rather than just price per square foot.

A few practical applications:

• Listing agents: Include a simple income analysis (gross rents, estimated NOI, implied cap rate) in your marketing package for income properties. It attracts investor buyers who are searching by yield, not list price.
• Buyer's agents: Run a quick cap rate sanity check on any income property before submitting an offer. If the seller's proforma implies a 7% cap but market comps trade at 5.5%, either the expenses are understated or there's a negotiating opportunity.
• Loan officers: DSCR lenders underwrite based on the property's income, not the borrower's personal income. Understanding cap rate helps you explain to borrowers why a lower cap property may still qualify (strong rent coverage) while a high cap deal in a soft market may not.

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Frequently asked questions

What is a good cap rate for a rental property?

It depends on the market and property type. In expensive coastal metros, 3–5% is common and considered acceptable because investors are betting on appreciation. In secondary and tertiary markets, many investors target 6–8%+. There's no universal "good" cap rate — the right benchmark is what comparable properties in the same submarket are trading at.

Does cap rate include the mortgage?

No. Cap rate is calculated using NOI, which explicitly excludes debt service. This makes it financing-neutral and useful for comparing properties regardless of how they're funded. To factor in your specific loan, calculate cash-on-cash return instead.

What expenses are included in NOI?

NOI includes all operating expenses: property taxes, insurance, management fees, maintenance, landlord-paid utilities, vacancy allowance, and HOA dues. It does not include mortgage payments, capital expenditure reserves, depreciation, or income taxes.

Can I use cap rate to estimate what a property is worth?

Yes — this is the income approach to valuation. Property Value = NOI ÷ Market Cap Rate. If you know the NOI and what similar properties are trading at (the prevailing market cap rate), you can derive an implied value. This is how commercial appraisers and institutional investors underwrite acquisitions and it's a useful negotiating tool for any income-property offer.

This tool is for educational and informational use only. It does not constitute investment, legal, tax, or financial advice. Always perform full due diligence and consult qualified professionals before making investment decisions.

Related tools: Mortgage Calculator · Seller Net Sheet Calculator · Commission Split Calculator · Real Estate CRM for Agents · Mortgage CRM for Loan Officers