Cap Rate Calculator
Calculate capitalisation rate and net operating income, and check the value the market implies for the property.
Your details
Parking, laundry, storage, pet rent.
Annual operating expenses
Set aside for roofs, HVAC and appliances. Leaving this out is the most common way cap rates get overstated.
Valuation
This calculator runs entirely on your device. Nothing you enter is uploaded, stored, or sold. How this works
Cap rate
4.84%
$21,766 NOI on $450,000
Includes your inputs, the full breakdown, and every row of the table.
Net operating income
$21,766
Effective gross income
$38,352
Operating expense ratio
43%
Gross rent multiplier
11.0
- Purchase price
- $450,000
- Annual gross income
- $40,800
- Vacancy allowance
- −$2,448
- Total operating expenses
- −$16,586
- Net operating income
- $21,766
- Cap rate
- 4.84%
- Value at a 6.5% market cap rate
- $334,865
- Priced above the market rate by
- $115,135
| Line | Annual | % of gross |
|---|---|---|
| Gross scheduled income | $40,800 | 100% |
| Less vacancy and credit loss | −$2,448 | 6.0% |
| Effective gross income | $38,352 | 94.0% |
| Property tax | −$6,200 | 15.2% |
| Insurance | −$1,800 | 4.4% |
| Maintenance | −$3,600 | 8.8% |
| Management | −$3,068 | 7.5% |
| Capital reserves | −$1,918 | 4.7% |
| Net operating income | $21,766 | 53.3% |
What this means
- At a 6.5% market cap rate this NOI supports a value of $334,865, which is below the $450,000 you entered.
- Cap rate deliberately excludes financing. Two buyers paying the same price for the same building have the same cap rate regardless of how they borrowed — that is what makes it useful for comparing properties, and useless for comparing deals.
- An operating expense ratio of 43% is in the normal band for residential rentals, which typically run between thirty-five and fifty percent.
How the cap rate calculation works
Cap rate is net operating income divided by price, and its usefulness comes entirely from what it leaves out. Financing is excluded, so two investors buying identical buildings get identical cap rates whether one paid cash and the other borrowed ninety percent. Depreciation and income tax are excluded too. What remains is a clean measure of what the property itself produces, which is exactly what you want when comparing one building against another and exactly what you do not want when evaluating your own deal.
The number is only as good as the expense assumptions underneath it, and this is where most listings mislead. Brokers routinely quote cap rates that omit capital reserves, use an optimistic vacancy rate, or assume you will self-manage for free. Those three omissions alone can move a cap rate by a point and a half. Setting aside money for the roof and the furnace is not optional — those costs are certain, merely infrequent — and management has a real market price whether you pay someone else or absorb it yourself.
Read cap rates as a market signal rather than a return. Low cap rates indicate buyers are paying a lot for each dollar of income, which reflects expected growth, perceived safety, or simply competitive bidding. High cap rates compensate for risk: weaker markets, older buildings, less reliable tenants. A ten percent cap rate is not a better deal than a five percent one; it is a different bet, and the market has usually priced the difference for a reason.
Frequently asked questions
What is a good cap rate?
There is no universal answer because cap rates price risk. Four to five percent is normal in expensive coastal markets, seven to nine in the Midwest and South, and higher still for older properties or weaker tenant bases. What matters is how the number compares to similar properties in the same submarket.
Should mortgage payments be included in the cap rate?
No. Cap rate is deliberately unlevered so that properties can be compared independently of how each buyer financed them. To measure your own return after borrowing, use cash-on-cash return instead.
Why is my cap rate lower than the listing said?
Almost always because the listing left something out. Capital reserves, property management, and a realistic vacancy allowance are the three most commonly omitted, and together they can easily account for a point or more of difference.
How do I use cap rate to value a property?
Divide the net operating income by the prevailing cap rate for comparable properties. This is the standard income approach to valuation, and it means raising NOI by a thousand dollars at a six percent cap rate adds roughly sixteen thousand to the property's value.
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Disclaimer. This calculator is provided for general information and educational purposes only and does not constitute financial, tax, legal, medical, or engineering advice. Results are estimates based on the inputs you provide and the assumptions described above. Confirm any figure with a qualified professional before acting on it.