Cap Rate Calculator
Find a property's capitalization rate from its income and price.
Details
Cap rate
9.69%
Monthly NOI
$3,230
Expense ratio
0%
This works out the capitalisation rate on a rental property: the annual return it produces relative to its price, ignoring financing.
Enter the price and either the net operating income directly or the rent and expenses, and it returns the cap rate along with the NOI it was based on.
What a cap rate is
Cap rate is the annual net operating income divided by the property's price or value, as a percentage. A property earning $18,000 a year after expenses, priced at $400,000, has a 4.5% cap rate.
Its purpose is comparison. Because it deliberately ignores how the deal is financed, two properties can be compared on their own merits regardless of who is borrowing what.
That is also its limitation. Cap rate says nothing about your actual cash flow, because your mortgage is not in it. For that you want cash-on-cash return instead.
NOI is rent minus operating expenses, but NOT minus the mortgage. Financing is deliberately excluded so the property can be judged separately from the buyer.
What to enter
- Property value / price
- The purchase price, or current market value if you already own it. Cap rate on what you paid years ago tells you little about today.
- Annual NOI
- Net operating income. Enter it directly if you have it, or use the rent and expense fields to build it up.
- Monthly rent and other income
- Gross rent plus anything else the property earns: parking, laundry, storage.
- Vacancy rate
- The share of the year you expect the property to sit empty. Assuming zero is the fastest way to an unrealistic cap rate.
- Operating expenses
- Tax, insurance, management, repairs, maintenance and any utilities you pay. Not the mortgage.
What belongs in NOI, and what does not
- Include: property tax
- A genuine ongoing cost of owning the asset.
- Include: insurance, management, repairs
- Including management even if you self-manage, since your time is not free.
- Include: vacancy allowance
- Deducted from gross rent before expenses. 5-8% is common.
- Exclude: mortgage payments
- The most common error. Financing is specific to you, not to the property.
- Exclude: depreciation
- An accounting entry, not cash leaving your pocket.
- Exclude: capital improvements
- A new roof is an investment in the asset, not an operating cost.
What this assumes
Income and expenses are stabilised annual figures, not one unusually good or bad month.
Cap rate is a snapshot at today's numbers. It says nothing about rent growth, appreciation or how the market moves.
How to calculate a cap rate
Build the NOI carefully, then divide. Almost every bad cap rate comes from a sloppy NOI rather than the division.
- net operating income
- Rent, minus vacancy, minus operating expenses
- property value
- Purchase price or current market value
Start with gross annual rent. Monthly rent × 12, plus any other income the property produces.
Take off vacancy. Deduct your expected empty period. Even a well-run rental turns over eventually.
Subtract operating expenses. Everything it costs to run the property, excluding the mortgage.
Divide by the price. That gives the cap rate. Compare it against other properties in the same market, not against a national figure.
See a worked example: a $400,000 property renting at $2,500 a month
- Price
- $400,000
- Gross rent
- $30,000 a year
- Operating expenses
- 40% of rent
Gross annual rent: $2,500 × 12 = $30,000.
Operating expenses at 40%: $12,000.
NOI: $30,000 − $12,000 = $18,000.
Cap rate: $18,000 ÷ $400,000 = 4.5%.
Working backwards, if similar properties trade at a 5% cap, that same $18,000 NOI implies a value of $360,000.
4.5% cap rate
Frequently asked questions
- What is a good cap rate?
There is no universal figure, and anyone quoting one is skipping the point. Cap rates reflect risk and location: a stable property in an expensive metro might trade at 4%, while a similar building in a weaker market might need 8% to attract a buyer.
A high cap rate is not automatically a better deal. It usually signals more risk, a weaker area, or a property that needs work. Compare against genuinely similar properties in the same market.
- Does the mortgage go into the cap rate?
No, and this is the mistake that ruins the number. NOI is calculated before financing.
That is deliberate: it lets you compare two properties without your loan terms distorting the picture. If you want a return figure that includes the mortgage, use cash-on-cash return instead.
- What's the difference between cap rate and cash-on-cash return?
Cap rate measures the property, ignoring financing, against its full value. Cash-on-cash measures your actual cash flow after the mortgage against the cash you actually put in.
Cap rate answers 'is this a good asset?'. Cash-on-cash answers 'is this a good deal for me?'. Leverage can make a mediocre cap rate produce a strong cash-on-cash return, and vice versa.
- Can I use cap rate to value a property?
Yes, and it is one of the standard methods. Divide the NOI by the prevailing market cap rate: $18,000 at a 5% market cap implies a value of $360,000.
The result is only as good as the cap rate you choose, so it needs genuine local comparables rather than a national average.
- Why is the cap rate on the listing higher than mine?
Because listing cap rates are marketing. They routinely assume no vacancy, no management fee, and repair costs well below what the building will actually need.
Rebuild the NOI yourself from realistic figures, including a management fee even if you plan to self-manage. The gap between the advertised cap rate and your own is often a point or more.
Problems people actually run into
Leaving the mortgage in the expenses
Deducting the loan payment from income produces something that looks like a cap rate and is not one. It makes a leveraged property look far worse than a cash purchase of the identical building, which is nonsense — it is the same building.
Keep financing out entirely. That is the whole reason the metric exists.
Assuming no vacancy and no management fee
A pro forma with 100% occupancy and no management cost is a fantasy, and it is exactly how deals get sold. Even a good rental sits empty between tenants, and self-managing is unpaid labour rather than a saving.
Building in 5-8% vacancy and 8-10% management typically knocks a full point off the headline cap rate, which is often the difference between a deal working and not.
Results are estimates for general information only and are not professional financial, medical, or legal advice. Read our full disclaimer.
Last updated: September 4, 2026
