Cap Rate Calculator
Enter the annual rental income, yearly operating expenses, and the property value or purchase price. The calculator returns the capitalization rate, net operating income, and gross rental yield so you can compare investment properties.
How to calculate cap rate
The capitalization rate is the annual net operating income (NOI) as a percentage of the property's value. NOI is your gross rental income minus operating expenses such as taxes, insurance, management, and maintenance, but not mortgage payments. A higher cap rate means more income per dollar of value, which usually signals higher return and higher risk. Cap rate ignores financing, so it lets you compare properties on the same basis regardless of how each is funded.
Cap rate = (net operating income / property value) x 100; NOI = annual rent - operating expenses
Worked example
A rental brings in $36,000 a year, costs $12,000 a year to operate, and is valued at $300,000.
- Net operating income: $36,000 - $12,000 = $24,000
- Cap rate: $24,000 / $300,000 = 0.08
- As a percentage: 0.08 x 100 = 8%
- Gross yield (before expenses): $36,000 / $300,000 = 12%
Result: The property has an 8% cap rate and a 12% gross yield.
Frequently asked questions
What is a good cap rate?
It depends on the market and risk, but many investors look for 5% to 10%. Lower cap rates (4% to 5%) are common in expensive, low-risk markets, while higher cap rates (8% or more) appear in cheaper or higher-risk areas. Compare a property's cap rate to similar properties in the same market rather than to a fixed target.
Does cap rate include the mortgage?
No. Cap rate uses net operating income, which excludes mortgage principal and interest. This is deliberate, so you can compare properties independently of how each is financed. To factor in a loan, look at cash-on-cash return instead.
What counts as an operating expense?
Property taxes, insurance, property management, repairs and maintenance, utilities you pay, and a vacancy allowance. Operating expenses exclude your mortgage payment, capital improvements, and depreciation. Underestimating expenses is the most common way cap rate gets inflated.
How do I use cap rate to estimate value?
Rearrange the formula: property value = net operating income / cap rate. If a property nets $24,000 a year and similar properties trade at an 8% cap rate, an estimated value is $24,000 / 0.08 = $300,000.