Cap Rate Calculator
Calculate the capitalization rate (cap rate) for investment properties to evaluate return potential.
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How to use this calculator
NOI is effective gross income (gross rent minus vacancy) minus annual operating expenses. The cap rate expresses NOI as a percentage of the property value, allowing apples-to-apples comparison between properties.
- 1
Enter the property purchase price or current market value and the monthly gross rent you expect to collect.
- 2
Set the vacancy rate (the percentage of time the property will sit empty) and your total annual operating expenses.
- 3
The calculator returns cap rate, gross yield, monthly NOI, and an overall performance assessment.
Frequently asked questions
What formula does this tool use for the cap rate?
This tool uses cap rate = net operating income ÷ property value × 100, where NOI = monthly rent × 12 × (1 − vacancy %) − annual operating expenses. With the defaults of a $400,000 value, $2,500 rent, 5% vacancy and $8,000 of expenses, NOI is $20,500 and the cap rate is 5.13%.
What should I put in annual operating expenses?
The tool subtracts exactly the figure you enter, once a year. By the standard definition NOI is before financing, so loan payments are not operating expenses; property tax, insurance and maintenance are the usual entries. Vacancy is applied separately to rent, so do not count it again here.
What do the gross yield and payback figures mean?
Gross yield is annual rent before vacancy and expenses ÷ property value, so 30,000 ÷ 400,000 is 7.50%. Payback period is property value ÷ NOI in years, 19.5 with the defaults. It is a simple ratio that ignores financing, growth in rent and changes in value. If NOI is zero or negative, the payback shows “n/a (NOI is zero or negative)”.
How is the assessment label chosen?
It follows fixed thresholds in the code: 8% or higher is labelled “Excellent”, 6% or higher “Good”, 4% or higher “Average” and anything lower “Low — may underperform”. They are the tool’s own cut-offs, not market benchmarks, and they say nothing about whether a particular property is a good purchase.
What happens if the property value is zero?
Cap rate, gross yield and payback do not divide by zero. The cap rate and gross yield show 0.00% and the label reads “Low — may underperform”, while rent, effective gross income and NOI still show their values. Enter a value above zero to get a meaningful ratio.
Can the cap rate be negative?
Yes. If expenses exceed effective rent, NOI is negative and so is the cap rate. The assessment then shows the lowest label and the payback line shows “n/a (NOI is zero or negative)”.
What does the cap rate ignore?
It ignores the mortgage, the amount of cash invested, rent growth, appreciation, income tax and one-off capital costs such as a new roof, unless you load them into expenses. Because it uses only one year of income, two properties with the same cap rate can have very different cash flow once financing is included.
Cap rate: net operating income as a share of value
From rent to NOI to cap rate
The calculation has three steps. Monthly rent is multiplied by 12 to give annual gross rent, vacancy is deducted from that to give effective gross income, and annual operating expenses are subtracted to leave net operating income. The cap rate is NOI divided by property value, expressed as a percentage. The tool also reports gross yield, monthly NOI and a payback period in years, which are different views of the same inputs. Only what you enter is subtracted: financing costs are not part of NOI.
Worked examples: two properties
The defaults, a $400,000 value with $2,500 monthly rent, 5% vacancy and $8,000 of expenses, give $30,000 of annual rent, $28,500 of effective gross income, NOI of $20,500, a cap rate of 5.13%, a gross yield of 7.50%, monthly NOI of $1,708 and payback of 19.5 years. A $250,000 property with $1,800 rent, 8% vacancy and $7,200 of expenses has $21,600 of rent, $19,872 effective, NOI of $12,672, a 5.07% cap rate, an 8.64% gross yield and payback of 19.7 years.
The same NOI at four prices
This table holds income and expenses at the default figures, so NOI is $20,500 in every row, and varies only the property value. It shows how strongly the ratio depends on price: the same income reads as a much lower cap rate at higher values. The assessment column is the tool’s built-in label for each result, not a view on any property.
| Property value | Cap rate | Gross yield | Payback | Assessment |
|---|---|---|---|---|
| $200,000 | 10.25% | 15.00% | 9.8 years | Excellent |
| $300,000 | 6.83% | 10.00% | 14.6 years | Good |
| $400,000 | 5.13% | 7.50% | 19.5 years | Average |
| $600,000 | 3.42% | 5.00% | 29.3 years | Low — may underperform |
Vacancy and expenses move NOI directly
On the $400,000 property, taking vacancy from 5% to 0% lifts NOI to $22,000 and the cap rate to 5.50%, while 15% vacancy lowers NOI to $17,500 and the rate to 4.38%. Raising annual expenses from $8,000 to $14,000 at 5% vacancy drops NOI to $14,500 and the cap rate to 3.62%, which the tool labels “Low — may underperform”. Because every dollar of expense reduces NOI one for one, an accurate expense figure matters more than a precise vacancy estimate.
Using the figure carefully
A cap rate is a single-year ratio. It does not account for how a purchase is financed, how rent or costs may change, or what you pay in tax, and the built-in assessment labels use fixed thresholds. Compare cap rates only when expenses are counted the same way for each property, and use the result as one input to your own analysis.
Learn more from an authoritative source:
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Results are estimates for informational purposes only and do not constitute professional financial, medical, legal, or technical advice. Read full disclaimer →