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Cap Rate Calculator
A cap rate calculator finds the capitalization rate of a rental property. Enter the property's annual net operating income and its current value, and it divides one by the other to give the cap rate — the yearly return the property earns on its value, before any mortgage payments.
Presets fill a typical expense ratio below — edit it to match the property.
Only used with a property type preset.
Share of gross rent spent on operating costs. Typical starting points: residential 40%, commercial 35%, retail 30%.
| Annual net operating income | |
| Property value | |
| Monthly net operating income | |
| Cap rate |
How it works
The capitalization rate, or cap rate, is the standard way to compare rental properties. It answers a simple question: if you paid cash for this property, what yearly return would its rent give you after its running costs? A higher cap rate means more income for the price, but it often also means more risk, a weaker location, or a property that needs work.
Net operating income, or NOI, is the property's yearly rent minus its yearly operating costs — property tax, insurance, maintenance, repairs, management, and an allowance for empty months — but before any mortgage payments and before income tax. Getting NOI right matters more than anything else in this calculation: if you forget a cost, the cap rate looks better than it really is. Property value is what the property is worth now, usually its purchase price or a recent valuation.
If you do not know the NOI yet, pick a property type above and enter the gross rent: the calculator fills in a typical operating expense ratio — 40% for residential, 35% for commercial, 30% for retail — and works out the NOI as rent minus those costs. The ratios are starting points only, so change the ratio to match the property: an older building or one with high taxes can run well above 40%, while a new building with a single tenant can run below 30%.
The formula is:
Cap rates are most useful for comparing similar properties in the same area. A 4% cap rate in a popular city and an 8% cap rate in a small town are not directly comparable, because the risks, rent growth, and tenant demand are different. In general, cap rates of 4% to 6% are common in high-demand areas, while 7% to 10% is more common where prices are lower and risk is higher. Remember that the cap rate is not your full return: it leaves out mortgage costs, tax, and any rise or fall in the property's value, so use it alongside those numbers, not instead of them.
Worked example
An investor is looking at a small apartment building valued at $300,000. After rent and operating costs, it earns $24,000 a year in net operating income.
The cap rate is $24,000 ÷ $300,000 × 100 = 8.0%. That means the property earns 8% of its value each year in net rent, before mortgage payments and tax.
For comparison, a similar building valued at $400,000 with the same $24,000 of net income would have a cap rate of only 6.0%. The cheaper building earns more for its price — but the investor should still check why it is cheaper, because a higher cap rate can hide higher vacancy, bigger repair bills, or a weaker location.
FAQ
What is a cap rate?
The cap rate is a property's yearly net operating income divided by its value, shown as a percentage. It estimates the yearly return you would earn if you bought the property with cash.
What is net operating income (NOI)?
NOI is a property's yearly rent minus its operating costs, such as tax, insurance, maintenance and management, before mortgage payments and income tax.
What is a good cap rate?
It depends on the area and the property. Cap rates of 4% to 6% are common in high-demand areas, while 7% to 10% is more common where prices are lower. A higher rate usually means higher risk as well as higher income.
Does the cap rate include mortgage payments?
No. The cap rate is calculated before any mortgage payments, so it shows the property's own return, not the return on the cash you put in after borrowing.
Can I use cap rate to compare two properties?
Yes, that is its main use — but only for similar properties in similar areas. Comparing a city apartment with a rural house by cap rate alone can be misleading.
What expense ratio should I use for each property type?
As a starting point, this calculator uses 40% for residential, 35% for commercial, and 30% for retail property — the share of gross rent spent on operating costs. Always adjust the ratio to the actual property: taxes, insurance, and maintenance vary widely by building and area.