Cap Rate Calculator
Judge the return on a rental property by calculating its cap rate and net operating income (NOI) in seconds
Property Financials
How Cap Rate is Calculated
The capitalization rate (cap rate) is a basic real estate measure of the potential return on an investment property. It is the property’s yield over one year, as if it were bought entirely with cash.
The formula: cap rate = (net operating income ÷ property value) × 100. Net operating income (NOI) is the gross annual rent minus all annual operating expenses, leaving out mortgage payments.
Investment Metrics
How to use this tool
- Enter the property value or purchase price.
- Enter the gross annual income (rent) the property produces.
- Enter the annual operating expenses: property tax, insurance, maintenance, HOA fees and management. Leave the mortgage payment out.
- Read the cap rate, the annual NOI and the monthly NOI before debt service.
Worked example
A building priced at 500,000 collects 48,000 a year in rent and costs 12,000 a year to operate. NOI is 48,000 − 12,000 = 36,000, so the cap rate is 36,000 ÷ 500,000 = 7.20%, and the monthly NOI is 3,000. If the seller quotes the same rent but you find 15,000 of real expenses, NOI falls to 33,000 and the cap rate to 6.60%, which shows why verifying expenses matters more than the headline rent. A cap rate ignores financing, vacancy swings and future growth, so use it to compare properties, not to predict returns.
Why this tool exists and where its numbers come from
Property investors compare buildings by the income they produce relative to their price. The tool uses the standard definition, net operating income ÷ market value, which ignores financing, taxes and future changes in rent or value.
Sources
For the full method, see the Methodology section just below.
Methodology
This tool uses the standard math for valuing income property. Its key figure, the cap rate, is the property’s first-year yield before financing, based on the figures you enter.
Marco compares two buildings and the bigger rent loses
Marco is choosing between two small rental buildings. Building A costs 320,000 and collects 30,400 a year; building B costs 450,000 and collects 39,600. B looks stronger because it pays more rent. He enters the numbers (same currency throughout) and adds the expenses each seller states.
- A: 30,400 − 9,600 = NOI 20,800. 20,800 ÷ 320,000 = 6.50%, monthly NOI 1,733.33.
- B: 39,600 − 15,300 = NOI 24,300. 24,300 ÷ 450,000 = 5.40%, monthly NOI 2,025.00.
B earns 3,500 more NOI a year, but it costs 130,000 more, so each unit of price yields less. Before choosing A, Marco asks A’s seller for twelve months of bills. They add 2,400 of repairs that were left out: expenses become 12,000, NOI 18,400 and the cap rate 5.75%, monthly NOI 1,533.33. The gap to B shrinks from 1.10 to 0.35 points. His decision: ask B’s seller for the same paperwork before comparing again. This is an estimate for information only, not investment advice; vacancy, financing and taxes are not included.
Frequently asked questions
What is a “good” cap rate? ▼
It depends on the market and the type of property. Lower cap rates (around 3–5%) usually mean lower risk and are common in prime, high-demand areas. Higher cap rates (8–10% or more) often mean higher potential returns, but also more risk, older buildings or less desirable locations.
Should I include my mortgage payment in the expenses? ▼
No. The cap rate looks at the property as if it were bought entirely with cash. Mortgage payments are debt service: they depend on your loan terms, not on what the property itself earns.
Is the Monthly NOI what ends up in my pocket? ▼
No. It is simply NOI divided by 12, calculated before any mortgage payment, vacancy, capital expenditures or income tax. Your actual take-home cash flow is usually lower, so treat this figure as the property's operating income per month, not as profit.
Why is my cap rate lower than the rent divided by the price? ▼
Because cap rate uses net operating income, not gross rent. Take a property valued at 400,000 with 36,000 of annual rent and 12,000 of operating expenses: NOI is 24,000, so the cap rate is 24,000 / 400,000 = 6.00% and the monthly NOI is 2,000. Dividing rent by price instead gives 9.00%, a gross yield that ignores taxes, insurance and upkeep and makes the same property look much stronger. Be consistent when comparing: the cap rate only means something next to other cap rates calculated from NOI.
What commonly goes missing, and how does it change the result? ▼
Omitted costs inflate the figure. If the example above ignored 3,000 a year for vacancy and repairs, NOI would be 21,000 and the cap rate 5.25% instead of 6.00%. Also remember that a very low or negative NOI produces a very low or negative cap rate, and an empty or zero property value shows 0.00%. Reading it backwards is a common use: NOI divided by a market cap rate gives an implied value, so 24,000 at 6% points to 400,000. Both directions are rough estimates, not an appraisal or investment advice.