How to use the cap rate calculator
- Choose what to find: the cap rate from a price, or the value from a target cap rate.
- Choose how to get net operating income (NOI): calculate it from rent and expenses, or enter a yearly NOI you already know.
- To calculate NOI, enter monthly rent, other income, a vacancy percent, property tax, insurance, maintenance, a management percent and any other owner-paid costs. Do not include mortgage payments or depreciation.
- Read the cap rate or value, the NOI breakdown and the table of values at nearby cap rates. Copy, print or download the result.
Formula
Effective gross income = (monthly rent + other income) x 12 x (1 - vacancy %)
Operating expenses = tax + insurance + maintenance + other costs + management % x effective gross income
NOI = effective gross income - operating expenses
Cap rate = NOI / price x 100
Value = NOI / (cap rate / 100)
The cap rate ignores financing. Mortgage payments, income taxes and depreciation are not part of NOI, which makes cap rates comparable between properties no matter how each is financed.
Worked examples
The defaults: rent of $3,000 a month with 5 percent vacancy gives effective gross income of $3,000 x 12 x 0.95 = $34,200. Operating costs are $4,800 of tax, $1,400 of insurance, $2,400 of maintenance and 8 percent management ($2,736), a total of $11,336. NOI is $22,864. On a $400,000 price the cap rate is 22,864 / 400,000 = 5.716 percent, shown as 5.72 percent.
Value at other cap rates: the same NOI is worth $484,817.64 in the 4.72 percent row of the table and $340,440.74 in the 6.72 percent row. A higher cap rate means a lower value for the same income.
A known NOI: an NOI of $26,000 on a $400,000 price is exactly 6.5 percent. In the other direction, $26,000 of NOI at a 6.5 percent target is worth $400,000, and the table shows $472,727.27 at 5.5 percent and $346,666.67 at 7.5 percent.
A property that loses money: at $500 of monthly rent the same costs exceed the income, NOI is negative and so is the cap rate (about -0.84 percent). The tool shows a warning and does not try to find a value.
What a cap rate tells you
The capitalization rate is the yearly net operating income divided by the price or value of the property. It estimates the income yield if you bought with cash and nothing about the income changed. Investors use it to compare similar properties quickly, and a higher cap rate usually reflects more income per dollar of price and often more risk or a weaker location.
It is not a return on your own cash, because it ignores your loan. For that, use the cash-on-cash return in the rental property calculator.
Which costs belong in NOI
NOI counts income from rent and other sources, less vacancy and the costs of operating the property: property tax, insurance, maintenance, management, utilities the owner pays and similar items. It leaves out mortgage principal and interest, depreciation, income taxes and one-time capital improvements. Being consistent matters more than the exact list, because a cap rate is only comparable when each property is measured the same way.
Using the value mode carefully
Dividing NOI by a target cap rate gives a value, but the answer is only as good as both inputs. A small change in the cap rate moves the value a lot, which is why the table shows the value at nearby rates. Cap rates come from what comparable properties sell for in your market, not from this tool. For the loan side of a purchase, see the mortgage calculator, and for the return on the money you put in, the ROI calculator.
Assumptions and limits
- NOI is for one year and excludes mortgage payments, depreciation, income taxes and capital improvements.
- Vacancy and management are percents of rent. Management is applied to effective gross income, after vacancy.
- Rent, expenses and the cap rate are the values you enter. Defaults are labeled examples, not market data.
- The cap rate assumes the NOI stays the same. Rent growth, expense growth and price changes are not modeled.
- This is an estimate for comparison, not investment advice or an appraisal.
Frequently asked questions
What is a good cap rate?
There is no single good number. It depends on the market, the property type and the risk. Compare a property with similar ones that sold nearby, and remember that a higher rate often goes with higher risk.
How do you calculate cap rate?
Divide yearly net operating income by the purchase price or current value, then multiply by 100. NOI is rent and other income minus vacancy and operating expenses, and it excludes the mortgage.
Does the cap rate include my mortgage?
No. The cap rate looks at the property as if you paid cash, so it ignores loan payments and interest. Use cash-on-cash return to see how financing affects the return on your own money.
What do I do with a cap rate in value mode?
Enter the NOI and the cap rate that similar properties trade at. The tool divides one by the other to estimate a value, and the table shows how that value shifts if the market rate is a little higher or lower.
Why is my cap rate negative?
The operating costs you entered are larger than the effective income, so NOI is below zero. That means the property does not cover its own expenses before any loan payment, which is a signal to recheck rent and costs.