Cap Rate Calculator

What a cap rate actually tells you

The capitalization rate is net operating income divided by price. NOI is the rent a property collects in a year minus everything it costs to run — property tax, insurance, repairs, management, and an allowance for vacancy — but before any mortgage payment. Divide that by what you pay for the building and you get the unlevered annual return, expressed as a percentage. It is the commercial real estate equivalent of a bond yield, and it is quoted the same way: a "6 cap" means the property throws off 6% of its price every year in operating income.

Because financing is deliberately excluded, the cap rate lets you line up a duplex bought with cash next to a fourplex bought with 80% leverage and see which building earns more per dollar of price. Two investors with wildly different loans see the same cap rate on the same asset. Mortgage terms are a fact about you; the cap rate is a fact about the property.

Worked example: 400,000 purchase, 36,000 rent, 12,000 expenses

Start with the default numbers. Annual gross rent is 36,000 (3,000 a month) and operating expenses run 12,000 a year. NOI is 36,000 − 12,000 = 24,000. The cap rate is 24,000 ÷ 400,000 = 0.06, or 6.00%. The expense ratio is 12,000 ÷ 36,000 = 33.33%, which is low but plausible for a newer single-family rental where the tenant pays utilities. Gross rental yield — rent over price, ignoring costs entirely — is 36,000 ÷ 400,000 = 9.00%. Notice the gap between 9% gross and 6% net: that three-point spread is exactly what the expense line does to a deal, and it is the reason listing agents love to quote gross yield.

Same property, solving for price

Now flip the calculation. You have decided you will not buy below a 7% cap in this submarket. Switch to "max purchase price", keep the 36,000 rent and 12,000 expenses, and set the target to 7. NOI is still 24,000, so the maximum price is 24,000 ÷ 0.07 = 342,857. Against a 400,000 asking price that is a 57,000 gap — your offer, in one line of arithmetic. Raise the target to 8% and the ceiling drops to 300,000; drop it to 5% and you could pay 480,000. Small changes in required yield move the price a long way, which is the whole story of the 2021 to 2024 valuation swing.

Same property, solving for the income you need

The third mode answers the seller's question. If the price is fixed at 400,000 and you need a 7% cap, the required NOI is 400,000 × 0.07 = 28,000. With expenses at 12,000, gross rent has to reach 40,000 a year, or 3,333 a month — an 11% rent increase over today's 3,000. That is the honest test of a value-add pitch: not "rents are below market" but "rents need to rise by this much, and here is why they will."

Screening with the 50% rule and the 1% rule

Most listings do not come with a trustworthy expense statement. The 50% rule assumes operating expenses eat roughly half of gross rent over a full ownership cycle, capital items included. On 36,000 of rent that means 18,000 of NOI and a 4.5% cap at 400,000 — considerably less attractive than the 6% the seller's numbers produced. Both figures are useful: the seller's 33% expense ratio is what the property does in a good year, and 50% is closer to a decade-long average once you fund a roof, a furnace and a turnover.

The 1% rule works from the other end. Monthly rent should be at least 1% of price: at 400,000 that means 4,000 a month, and this property collects 3,000, or 0.75%. It fails, which is normal for coastal and high-appreciation metros and is why the tool reports the actual percentage rather than a pass or fail alone. Use it to sort a list of twenty candidates in ten seconds, never to decide anything on its own.

Cap rate compression, and why it cuts both ways

Cap rates move inversely to price. When buyers accept lower yields — cheap debt, competitive bidding, expectations of rent growth — cap rates compress and values rise. Between 2015 and 2021 US multifamily cap rates fell by roughly 150 basis points; on a property with 24,000 of NOI, a fall from 6.5% to 5.0% lifts value from 369,000 to 480,000 without the rent moving at all. When rates on debt climb, the process reverses: buyers demand a spread over their borrowing cost, cap rates expand, and the same NOI supports a smaller price. Anyone underwriting an exit should assume they sell at a cap rate at least as high as the one they bought at, and should check what a one-point expansion does to the plan.

Cap rate versus cash-on-cash, in numbers

Take the 6% cap deal and finance it with 320,000 at 6.5% over 30 years — about 2,023 a month, or 24,271 a year. NOI of 24,000 minus debt service leaves roughly −271 of cash flow on 80,000 of equity: slightly negative cash-on-cash. Fund the same purchase at 5.0% and the payment falls to about 20,614, leaving 3,386 a year, or 4.2% cash-on-cash. Identical building, identical cap rate, completely different outcome for the investor. That divergence is the point of keeping the two metrics separate: cap rate prices the asset, cash-on-cash prices your deal.

What this calculator does not include

Four things sit outside NOI by convention and should be handled separately. Mortgage principal and interest are excluded on purpose. Capital expenditure — roofs, HVAC, repiping — is excluded from most quoted NOI figures, so budget a reserve of 5 to 10% of rent on top of your operating expenses when you own older stock. Depreciation and your personal income tax are excluded, and they can turn a modest cash return into a strong after-tax one. Finally, the number is only as good as the expense line: sellers routinely omit management fees because they self-manage, and omit vacancy because the unit happened to stay full. Add 8 to 10% of rent for management and 5 to 8% for vacancy even if the seller's statement shows zero, and see whether the deal still clears your target.

One last framing point: a cap rate is a market price, not a quality score. An 8.5% cap in a shrinking rust belt town and a 4.5% cap in a growing sun belt suburb can both be fairly priced, because the buyer of the first is being paid for risk and flat rents while the buyer of the second is accepting less income today in exchange for rent growth and liquidity. Compare cap rates only against recent sales of similar buildings in the same submarket, and treat any figure far above the local band as a question to investigate rather than a bargain to grab.