Cap Rate Calculator: Find a Rental Property's Capitalization Rate
The capitalization rate, or cap rate, is the first number most investors check on a rental property: it tells you what the property earns each year, before any mortgage, as a percentage of its price. This cap rate calculator works out the net operating income (NOI) from your rent and expenses, gives you the cap rate, and shows the most you should pay to hit the return you want.
Cap rate calculator
NOI excludes mortgage payments, depreciation and income taxes, as the standard cap rate definition does. Nothing you enter leaves your browser.
What is a cap rate?
A cap rate measures a property's unleveraged yield: the return you would earn in a year if you paid all cash. Because it ignores how the purchase is financed, it lets you compare properties fairly, a duplex in one city against a small apartment building in another, before you think about loans.
It is also how the market prices income property. When buyers in an area accept a lower cap rate, they are paying more for each dollar of income; a higher cap rate means a cheaper price for the same income, usually because buyers see more risk.
How to calculate cap rate
1. Gross potential income
Monthly rent plus any other income (parking, laundry, storage), times 12. In the example: ($2,400 + $0) × 12 = $28,800.
2. Effective gross income
Subtract vacancy and unpaid rent. At 5% vacancy: $28,800 × 0.95 = $27,360.
3. Operating expenses
Everything it costs to run the property: property taxes, insurance, repairs and maintenance, management, HOA fees, utilities you pay and other costs. Here: $3,600 taxes + $1,500 insurance + $600 other + 16% of collected rent for maintenance and management = $10,078 a year (an expense ratio of 36.8%).
Leave out the mortgage, depreciation, income taxes and major capital improvements such as a new roof: those are financing, tax or capital items, not operating expenses.
4. Net operating income and cap rate
NOI = $27,360 − $10,078 = $17,282. Cap rate = $17,282 ÷ $300,000 = 5.76%.
How price changes the cap rate
For the same income, the cap rate moves opposite to the price you pay:
| Purchase price | NOI | Cap rate |
|---|---|---|
| $270,000 | $17,282 | 6.40% |
| $300,000 | $17,282 | 5.76% |
| $340,000 | $17,282 | 5.08% |
Turn the formula around to find your maximum price: price = NOI ÷ target cap rate. If you want a 7% cap rate on this property, the most you should pay is $17,282 ÷ 0.07 = $246,891. The calculator's last box does this for you.
What is a good cap rate?
There is no single good cap rate; it depends on risk, location and property type. Many residential investors look for something in the region of 5% to 10%, but that is a rule of thumb, not a standard:
- Lower cap rates (often under 5%) are common in expensive, high-demand cities and for new, low-risk buildings: buyers accept less income for stability and expected appreciation.
- Higher cap rates (often 8% and up) are common in smaller markets, older buildings or tougher neighborhoods, where the extra income pays you for more vacancy, repair and resale risk.
Compare a property's cap rate with similar properties that recently sold nearby, not with a national average.
Cap rate vs. cash on cash return vs. ROI
| Measure | Formula | Includes the mortgage? | Best for |
|---|---|---|---|
| Cap rate | NOI ÷ price | No | Comparing properties and pricing them |
| Cash on cash return | Annual cash flow ÷ cash invested | Yes | Your actual return with a loan |
| Total ROI | All gains (cash flow, paydown, appreciation) ÷ cash invested | Yes | The full picture over years |
Common cap rate mistakes
- Using the seller's "pro forma" numbers. Projected rents and suspiciously low expenses inflate the cap rate. Ask for actual rent rolls and 12 months of expenses.
- Forgetting vacancy and management. Even if you self-manage, include a management cost: it keeps the comparison honest and covers your time.
- Using last year's property taxes. Taxes are often reassessed after a sale; estimate them at your purchase price.
- Including the mortgage in NOI. That turns cap rate into a different (and incomparable) number.
Frequently Asked Questions
How do you calculate cap rate?
Divide the property's net operating income by its price or current value and multiply by 100. NOI is the yearly rent and other income, minus vacancy and operating expenses such as taxes, insurance, maintenance and management, but not the mortgage.
Is a higher cap rate better?
A higher cap rate means more income for the price, but it usually comes with more risk, such as a weaker location, an older building or less stable tenants. Compare cap rates between similar properties in the same market.
Does cap rate include the mortgage?
No. Cap rate is calculated before financing, so it ignores the loan. To measure your return including the mortgage, use cash on cash return.
What is a good cap rate for a rental property?
Many residential investors aim for roughly 5% to 10%, with lower rates in expensive, high-demand areas and higher rates in smaller or riskier markets. The best guide is the cap rate of similar properties that sold recently nearby.
Can a cap rate be negative?
Yes, if operating expenses exceed the income, NOI is negative and so is the cap rate. That property loses money before any mortgage, so it only makes sense with a clear plan to raise rents or cut costs.
Sources
- IRS Publication 527, Residential Rental Property: which rental expenses are operating costs and which are capital improvements.
- Standard NOI and capitalization definitions used in commercial real estate appraisal (the income approach).