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.
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Enter the property purchase price or current market value and the monthly gross rent you expect to collect.
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Set the vacancy rate (the percentage of time the property will sit empty) and your total annual operating expenses.
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The calculator returns cap rate, gross yield, monthly NOI, and an overall performance assessment.
Frequently asked questions
What is a good cap rate?
Cap rate benchmarks vary by market. In high-demand urban markets, 4–5% may be considered acceptable. In secondary or tertiary markets, 7–10% is more common. As a general rule, higher cap rates signal higher returns but often higher risk, while lower cap rates are typical in competitive, stable markets.
What expenses should I include?
Operating expenses include property taxes, insurance, property management fees (typically 8–12% of rent), routine maintenance, landscaping, and any HOA fees. Do NOT include mortgage payments — cap rate is calculated on the property value, not your financing terms.
How does cap rate differ from cash-on-cash return?
Cap rate is a property-level metric that ignores financing. Cash-on-cash return measures the annual pre-tax cash flow relative to your actual cash invested (down payment). Cap rate is useful for comparing properties; cash-on-cash reflects your personal investment return given your specific loan terms.
Cap Rate: The Essential Metric for Real Estate Investors
What Cap Rate Tells You About a Property
The capitalization rate (cap rate) is the most widely used metric for evaluating investment properties. It tells you what percentage of the property value you earn in net operating income each year, independent of how you finance the purchase. A $400,000 property with a 6% cap rate generates $24,000 in NOI annually. This makes it easy to compare properties of different sizes and prices on equal footing.
Cap Rate Limitations Investors Should Know
Cap rate is a snapshot metric — it does not account for appreciation, mortgage financing, tax benefits, or capital expenditures (roof replacement, HVAC). A property with a low cap rate in a high-growth market may outperform a high-cap-rate property in a stagnant area over the long term. Always use cap rate alongside other metrics like cash-on-cash return, gross rent multiplier, and market trend analysis for a complete picture.
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 →