Cap Rate Calculator

Find the capitalization rate of an income property: Cap Rate = Net Operating Income / Property Value. Enter the purchase price, gross rental income, vacancy loss, and operating expenses to get NOI, effective gross income, and the resulting cap rate.

Quick Facts

Formula
Cap Rate = NOI / Property Value
NOI is effective gross income minus operating expenses, expressed as a percentage of the purchase price.
Excludes
Mortgage payments and capital expenditures
Cap rate assumes an all-cash purchase, so it is independent of how the deal is financed.

Your Results

Calculated
Cap rate
-
Net operating income / property value
Net operating income
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Effective gross income minus operating expenses
Effective gross income
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Gross rental income after vacancy & credit loss
Operating expense ratio
-
Operating expenses / effective gross income

Ready

Enter the purchase price, rental income, vacancy rate, and operating expenses, then press Calculate.

How the Cap Rate Calculator works

The capitalization rate, or cap rate, is the most common shorthand real estate investors use to compare income properties on an apples-to-apples basis. It expresses a property's annual income as a percentage of its price, as if the entire purchase were made in cash. Because it ignores financing, cap rate lets you compare a property bought with a mortgage against one bought outright, or compare two properties in different price ranges, on the same footing.

The formula

Cap rate is built from two supporting figures. First, Effective Gross Income (EGI) is the gross rental income the property could collect, reduced by a vacancy and credit loss allowance for periods it sits empty or rent goes uncollected:

EGI = Gross Rental Income x (1 − Vacancy Rate)

Second, Net Operating Income (NOI) subtracts the property's annual operating expenses — property taxes, insurance, maintenance, management fees, and similar costs — from EGI. It deliberately excludes mortgage payments, income taxes, and capital expenditures:

NOI = EGI − Operating Expenses

The cap rate is then NOI divided by the property's purchase price or current market value, expressed as a percentage:

Cap Rate = NOI / Property Value x 100

Worked example

Take a $400,000 property with $48,000 in gross annual rental income, a 5% vacancy and credit loss allowance, and $14,000 in annual operating expenses. Effective gross income is $48,000 x (1 − 0.05) = $45,600. Net operating income is $45,600 − $14,000 = $31,600. The cap rate is $31,600 / $400,000 = 7.9%.

What moves the cap rate most

  • Purchase price: the same income produces a lower cap rate at a higher price, so cap rate often tracks how "expensive" a market or property is relative to its income.
  • Vacancy and credit loss: a higher vacancy assumption shrinks effective gross income directly, so it flows straight through to NOI and the cap rate.
  • Operating expenses: underestimating expenses is one of the most common ways cap rate calculations end up too optimistic — include realistic figures for taxes, insurance, repairs, and management.

What cap rate does not tell you

Cap rate assumes an all-cash purchase and says nothing about your actual cash flow if you finance the property with a mortgage, nor does it account for appreciation, tax benefits, or major one-time capital expenditures like a roof replacement. Investors who use leverage typically pair cap rate with a cash-on-cash return calculation, which does include the mortgage payment, to understand the return on the cash actually invested. Use cap rate as a first screen and comparison tool, not a complete underwriting model.

Frequently Asked Questions

How is cap rate calculated?
Cap rate = Net Operating Income (NOI) / Property Value x 100. NOI is effective gross income (gross rental income minus vacancy and credit loss) minus annual operating expenses. The result is expressed as a percentage yield on the property's price, independent of how it is financed.
What counts as an operating expense in the cap rate formula?
Operating expenses include property taxes, insurance, maintenance and repairs, property management fees, utilities paid by the owner, and reserves for replacement. Mortgage payments (principal and interest), income taxes, and capital expenditures such as a new roof are excluded, since cap rate is meant to measure the property's income performance independent of financing.
What is considered a good cap rate?
There is no universal good cap rate - it depends on property type, location, and risk. Many investors use roughly 4% to 10% as a general reference range: lower cap rates are typical of stable, high-demand markets where investors accept a lower yield for perceived safety, while higher cap rates often reflect higher perceived risk, older buildings, or secondary markets. Always compare within the same market and property type.
Does cap rate account for a mortgage?
No. Cap rate assumes an all-cash purchase and excludes debt service entirely, which makes it useful for comparing properties on their own income-generating merits regardless of how each buyer finances the deal. To evaluate a leveraged purchase, investors typically pair cap rate with a cash-on-cash return calculation that does include the mortgage payment.

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