Calculate the capitalization rate for any rental property — enter total or itemized expenses to find your NOI, cap rate, and estimated property value at different market cap rates.
Cap rate (capitalization rate) is the most important metric commercial and residential real estate investors use to evaluate income properties. It measures a property's income yield independent of financing, making it the fairest apples-to-apples comparison between properties. This calculator lets you enter either total annual expenses or itemize each cost for a more precise result.
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Cap rate is calculated as: Cap Rate = Net Operating Income ÷ Property Value × 100. It tells you what percentage of the property's value you earn in income each year, before any debt service. A 6% cap rate means you earn 6% of the property's value in NOI annually. This is the universal language of commercial real estate.
Cap rates vary significantly by market type, property class, and economic conditions:
Cap rate ignores financing entirely. Cash-on-cash return includes your mortgage payments and measures the return on YOUR cash invested. You can have a 7% cap rate but negative cash-on-cash return if you financed at a high interest rate. In today's environment with 7%+ mortgage rates, many properties with 6% cap rates produce negative cash flow — meaning the cap rate exceeds the available financing cost is a key consideration.
If you know what cap rate the market applies to a property type (ask local commercial brokers for "market cap rates"), you can estimate a property's value: Value = NOI ÷ Market Cap Rate. If similar properties sell at a 7% cap rate and your property has $21,000 NOI, the implied value is $21,000 / 0.07 = $300,000. This is how commercial real estate is appraised.
Mortgage payments are excluded from cap rate calculations — cap rate is a property metric, not a financing metric. Also excluded: capital expenditure reserves (though they should be included in your actual expense budget for cash flow analysis), income taxes, and depreciation. Some analysts include vacancy in expenses; others deduct it from income — this calculator deducts it from income to calculate effective gross income first.
In most suburban and secondary markets, a cap rate of 5–7% is considered acceptable. In primary coastal markets, 4–5% is more typical. For cash flow investors, a cap rate of 7%+ is often the minimum threshold that produces positive cash flow with today's interest rates. Cap rates vary widely by property type, location, and condition — always compare to local comps.
Ask the listing agent or broker for the property's current NOI and annual income/expense statement. Verify these numbers with your own analysis — sellers sometimes present "proforma" (projected) numbers rather than actual trailing 12-month income. Always base your cap rate on verified actual income and all realistic expenses.
Not necessarily. A high cap rate can signal a strong income stream — or it can signal a riskier asset in a declining market with high vacancy or deferred maintenance. Cap rate must be evaluated in context: a 9% cap rate in a shrinking rural town may be riskier than a 5% cap rate in a growing metro.
Cap rate is a property-level metric that ignores financing and shows the income yield on the full property value. ROI (return on investment) typically accounts for your leveraged position — how much return you earn on the cash you personally invested. A financed property can have a much higher ROI than its cap rate because leverage amplifies returns (and losses).
NOI = Effective Gross Income (gross rent minus vacancy losses) minus all operating expenses. Operating expenses include property taxes, insurance, property management, repairs and maintenance, HOA, utilities paid by owner, and administrative costs. Do NOT include mortgage payments, income tax, depreciation, or capital expenditures in NOI.