Real Estate

Cap Rate Calculator

Enter your Net Operating Income and property value to calculate capitalization rate and compare investments.

Quick Answer

Cap Rate = NOI / Property Value. A $600,000 property producing $50,000 NOI has an 8.33% cap rate. Most residential investments fall between 4-10%, with higher cap rates indicating higher risk and potential return.

$
$
$

Market Cap Rate

8.33%

High (higher risk/reward)

Purchase Cap Rate

8.62%

Gross Rent Multiplier

12.0x

Cap Rate Benchmarks by Market Type

Class A Urban Core
3-5%
Suburban Multi-Family
5-7%
Secondary Market
6-8%
Value-Add / C-Class
7-10%
Rural / High-Risk
8-12%

Your cap rate of 8.33% is highlighted above.

Disclaimer: This calculator provides estimates for informational purposes only and does not constitute financial or investment advice. Cap rates vary by market, property condition, and economic factors. Consult a qualified real estate professional before making investment decisions.

About This Tool

The Cap Rate Calculator helps real estate investors quickly evaluate property returns using the capitalization rate formula. Cap rate is the most widely used metric in commercial and residential investment real estate for comparing properties independent of financing.

How Cap Rate Works

Capitalization rate equals Net Operating Income divided by property value. NOI includes all rental income minus operating expenses like property taxes, insurance, maintenance, property management fees, and vacancy allowance. It does not include mortgage payments or capital expenditures, which makes it useful for apples-to-apples comparisons.

Market vs. Purchase Cap Rate

The market cap rate uses current market value as the denominator. The purchase cap rate uses your actual acquisition price. If you negotiate a below-market purchase price, your purchase cap rate will be higher than the market cap rate, indicating a better deal on a cash-flow basis.

What Drives Cap Rate Differences

Location, property class, and market conditions are the primary drivers. Class A properties in gateway cities trade at lower cap rates (3-5%) because investors accept lower yields in exchange for stability and appreciation potential. Secondary markets and value-add properties offer higher cap rates (7-10%+) but with more management intensity and risk.

Frequently Asked Questions

What is a good cap rate for rental property?
A 'good' cap rate depends on market and risk tolerance. Class A properties in major cities often trade at 3-5%, while secondary markets or value-add properties may offer 7-10%. Higher cap rates mean higher potential returns but usually come with more risk, deferred maintenance, or less desirable locations.
How do you calculate cap rate?
Cap rate equals Net Operating Income (NOI) divided by property value or purchase price, expressed as a percentage. NOI is annual gross rental income minus operating expenses (taxes, insurance, maintenance, management, vacancies) but before mortgage payments.
What is the difference between cap rate and ROI?
Cap rate measures property return independent of financing — it uses the full property value. ROI (return on investment) measures return on your actual cash invested, including the effect of leverage. A leveraged deal can have a much higher ROI than cap rate if mortgage rates are below the cap rate.
Does cap rate include mortgage payments?
No. Cap rate is calculated before debt service. It uses Net Operating Income (NOI), which excludes mortgage principal and interest. This makes cap rate useful for comparing properties regardless of how they are financed.
Why is cap rate important for real estate investors?
Cap rate lets you quickly compare the return potential of different properties on an apples-to-apples basis. It also helps determine if a property is priced fairly relative to its income. Tracking cap rates across markets reveals where values are rising or falling.

You might also like

Real Estate

House Flipping Calculator

Calculate profit, ROI, and margins for fix-and-flip projects.

⏱ 2 minReal Estate

Closing Cost Calculator

Estimate home purchase closing costs with itemized breakdown.

⏱ 2 minReal Estate

GRM Calculator

Calculate gross rent multiplier to compare investment properties.

⏱ 1 min