Cap Rate Calculator
Calculate the capitalization rate for an investment property to compare returns across properties regardless of financing.
Results
Visualization
How It Works
The capitalization rate (cap rate) is the ratio of a property's net operating income to its market value. It lets you compare investment properties on an apples-to-apples basis, stripping out financing differences so you can focus on the property's intrinsic return.
The Formula
Variables
- NOI — Net operating income — gross rent minus all operating expenses, excluding debt service
- Property Value — Current market value or asking price of the property
- Cap Rate — Annual return percentage the property generates before financing costs
- Operating Expenses — Taxes, insurance, maintenance, management, utilities paid by owner
Worked Example
A property is listed at $325,000. It generates $27,000 in annual rent and has $8,500 in operating expenses. NOI = $27,000 - $8,500 = $18,500. Cap rate = ($18,500 / $325,000) x 100 = 5.69%. This means the property returns about 5.7% annually before debt service.
Practical Tips
- Cap rates between 4-10% are typical — lower in expensive metros, higher in secondary markets.
- A higher cap rate means higher return but usually signals higher risk or a less desirable location.
- Never include mortgage payments in operating expenses when computing cap rate.
- Compare cap rates only within the same market and property type for meaningful analysis.
- Verify the seller's stated expenses — underreported costs inflate the cap rate and mislead buyers.
Frequently Asked Questions
What is a good cap rate for rental property?
It depends on the market. In major cities like New York or LA, 3-5% is normal. In smaller cities, 6-10% is common. A 'good' cap rate is one that meets your return goals relative to the risk you're taking.
Does cap rate include mortgage payments?
No. Cap rate only uses net operating income, which excludes debt service. This is intentional — it lets you evaluate the property itself, separate from how you finance it.
Is a higher cap rate always better?
Not necessarily. Higher cap rates often come with higher risk — rougher neighborhoods, older buildings, less stable tenants. A 10% cap rate property may cost you more in vacancies and repairs than a stable 5% property.
How is cap rate different from ROI?
Cap rate measures the property's unlevered return. ROI factors in your actual investment, including leverage. If you put 20% down on a property with a 6% cap rate, your ROI could be much higher due to leverage.
Can cap rate be negative?
Yes, if operating expenses exceed gross rental income. A negative cap rate means the property loses money operationally — you'd need appreciation or tax benefits to justify the investment.