Cap Rate Calculator
Work out capitalization rate from net operating income and price, and value an income stream at a target rate.
Content updated August 10, 2026
The cap rate deliberately ignores financing, so it describes the property rather than your mortgage. It is a comparison tool between assets in the same market, not a forecast of your return. Estimates only, not investment advice.
The capitalization rate expresses a property's annual net income as a percentage of its price. It is the standard way of comparing income-producing property, precisely because it strips financing out of the picture: the same building at the same price has the same cap rate whether the buyer pays cash or borrows heavily.
This calculator derives net operating income from rent, vacancy and operating expenses, divides it by the price to give the cap rate, and then runs the calculation backwards — valuing that same income stream at whatever rate you require.
The Cap Rate formula
Cap rate = NOI ÷ property value × 100 · Value = NOI ÷ (cap rate ÷ 100)NOI = (gross rent + other income) × (1 − vacancy rate) − operating expenses, where operating expenses exclude mortgage payments, capital expenditure, depreciation and income tax.
Worked example
A property renting at 2,200 a month is 26,400 a year. With a 5% vacancy allowance, effective gross income is 25,080; subtract 8,400 of annual operating expenses and NOI is 16,680. At a purchase price of 250,000 that is a cap rate of 16,680 ÷ 250,000 × 100 = 6.67%. The same income valued at a required 8% would support a price of 208,500.
Assumptions, rounding, and limitations
Assumptions
- Net operating income excludes mortgage payments, capital expenditure, depreciation and income tax.
- The vacancy allowance is applied to gross scheduled income before operating expenses are subtracted.
- Income and expenses are treated as a stable annual figure rather than a projection with growth.
- The implied value uses the income approach: value = NOI ÷ cap rate.
Rounding: Net operating income and the cap rate are computed at full floating-point precision. The cap rate is displayed to two decimal places and currency amounts to the nearest whole unit.
Limitations
- A cap rate is a single-year snapshot and does not account for rent growth, expense inflation, lease terms or tenant quality.
- A high cap rate often reflects higher perceived risk rather than a better deal.
- Comparisons are only meaningful between similar properties in the same market and at the same point in time.
- Excludes capital expenditure, which is a real long-run cost of ownership.
- This is a general analysis tool, not investment or valuation advice, and it is not an appraisal.
Sources
- Financial Stability Report — Asset Valuations (capitalization rates) — Board of Governors of the Federal Reserve System
The formula and what belongs in it
Cap rate is net operating income divided by property value, expressed as a percentage. The difficulty is never the division; it is deciding what counts as net operating income.
Include rent and other recurring property income. Subtract a vacancy allowance, then subtract operating expenses — property tax, insurance, maintenance, management, HOA or service charges, and owner-paid utilities.
Exclude the mortgage, capital expenditure, depreciation and income tax. A cap rate computed with the mortgage included is not a cap rate, and it will not compare against any published figure.
Using cap rate to value an income stream
Because cap rate is NOI divided by value, the relationship inverts: value equals NOI divided by the cap rate. This is the income approach to valuation, and it is how the same net income can be worth very different amounts in different markets.
Income of 15,000 a year is worth 250,000 at a 6% cap rate and 187,500 at 8%. Nothing about the building changed — only the return a buyer in that market demands. The calculator shows this figure alongside the difference from your entered price, so you can see whether the asking price implies a rate you would accept.
What a cap rate cannot tell you
A cap rate is a snapshot of one year's income against today's price. It says nothing about rent growth, the condition of the roof, the quality of the tenants, or where interest rates go next.
Higher is not automatically better either. Cap rates tend to be higher where perceived risk is higher, so a rate well above the local norm is usually the market pricing in something — vacancy risk, deferred maintenance, or a weaker location — rather than a bargain nobody else noticed.
Frequently asked questions
▶How do you calculate cap rate?
Divide net operating income by the property value and multiply by 100. NOI is annual income after vacancy and operating expenses but before mortgage payments, capital expenditure, depreciation and income tax.
▶What is a good cap rate?
It depends entirely on the market and asset type, and there is no universal target. Cap rates generally sit higher where risk is higher, so the meaningful comparison is against similar properties in the same area rather than against a fixed number.
▶Does the cap rate include the mortgage?
No. Excluding debt service is the whole point — it lets two buyers with different financing compare the same property on the same basis. Including the mortgage produces a figure that cannot be compared with any published cap rate.
▶What is the difference between cap rate and cash-on-cash return?
Cap rate measures the property and ignores financing. Cash-on-cash measures your position, dividing cash flow after debt service by the cash you actually invested. They answer different questions and routinely disagree.
▶Can I use cap rate on a single-family rental?
Yes, the arithmetic works on any income property. It is used most heavily in commercial and multifamily, where comparable cap-rate data is easier to find; for single-family homes, sale prices are often driven more by owner-occupier demand than by income.
Learn more
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Open calculator →Disclaimer: Cap Rate Calculator results are estimates for general information and education only, and are not financial, tax, legal or medical advice. Verify important decisions with a qualified professional.