Finance Calculator
Cap Rate Calculator
Work out a property's capitalization rate and net operating income. Enter the value with either rental income and expenses, or an NOI figure you already have, to get the cap rate with a step-by-step breakdown and where it sits against market benchmarks.
Cap Rate Calculator
Capitalization rate and net operating income
Purchase price or current market value
NOI is calculated as gross rental income minus operating expenses.
Annual, before expenses
Annual, excluding mortgage
Results
Cap Rate
7.50%
Moderate
Net Operating Income
$30,000
per year
Moderate — 7.50%
A common range for stable residential and small commercial property. Income and risk are both middling.
Where This Sits
Cap Rate at Other Prices
Cap rate excludes mortgage payments on purpose. It describes the property, not your financing, which is what makes two properties comparable.
At this cap rate you are paying $13.33 of price for every $1 of annual NOI, and recovering the purchase price would take about 13.3 years of NOI at today's figures.
Operating expenses are 37.5% of gross income, leaving 62.5% as NOI.
Capital expenditure — a roof, a boiler, a repipe — is excluded from NOI by convention but is very real. Budgeting a reserve will lower your actual return below the cap rate.
Step-by-Step Calculation
Step 1 — Net Operating Income
NOI = Gross Rental Income − Operating Expenses
NOI = $48,000 − $18,000 = $30,000
Step 2 — Cap Rate
Cap Rate = (NOI ÷ Property Value) × 100
Cap Rate = ($30,000 ÷ $400,000) × 100
Cap Rate = 7.50%
Understanding Cap Rate
The capitalization rate expresses a property's annual income as a percentage of its price. A building worth $400,000 that nets $30,000 a year has a 7.50% cap rate — it returns 7.5% of its value annually, before any financing.
Its real purpose is comparison. Because the figure is unlevered, it describes the property rather than the buyer, which lets you put two buildings side by side regardless of how either is paid for. That is also why it tells you nothing about your personal return.
Cap rate is a one-year snapshot at today's numbers. It has no view on appreciation, no view on your mortgage, and no allowance for the roof you will eventually replace. Useful as a first filter; not a substitute for the full picture.
Cap Rate Formulas
1. Net Operating Income
2. Cap Rate
3. Rearranged for Value
What Counts as an Operating Expense
Getting this boundary right matters more than any other input, because everything excluded inflates the cap rate:
- Property taxes
- Insurance
- Maintenance and repairs
- Property management fees
- Utilities you pay
- Vacancy allowance
- Mortgage principal and interest
- Income tax
- Depreciation
- Capital expenditure (roof, boiler, repipe)
- Leasing commissions on new space
- Your own unpaid labour
Most residential rentals run an expense ratio of 35% to 45% of gross income once vacancy, maintenance, management and reserves are counted honestly. A ratio far below that usually means something has been left out rather than that the property is unusually efficient.
How Expenses Drive the Cap Rate
On a $400,000 property with $48,000 of gross rental income, the expense ratio alone swings the cap rate across three bands:
| Expense Ratio | Expenses | NOI | Cap Rate |
|---|---|---|---|
| 25% | $12,000 | $36,000 | 9.00% |
| 30% | $14,400 | $33,600 | 8.40% |
| 35% | $16,800 | $31,200 | 7.80% |
| 37.5% (Example 1) | $18,000 | $30,000 | 7.50% |
| 40% | $19,200 | $28,800 | 7.20% |
| 45% | $21,600 | $26,400 | 6.60% |
| 50% | $24,000 | $24,000 | 6.00% |
Trimming expenses by just $4,800 — a 10% understatement of gross income — moves Example 1 from 7.50% to 8.70%. That 1.2 point gap is the difference between a Moderate and a High cap rate on a property that has not changed at all, which is why a seller's pro forma is worth rebuilding from your own figures.
Price Is the Lever You Control
The income a building produces is largely fixed by the market. The price you pay is not. The same $30,000 of NOI across different purchase prices:
| Purchase Price | Cap Rate | Band |
|---|---|---|
| $300,000 | 10.00% | Very High |
| $350,000 | 8.57% | High |
| $400,000 | 7.50% | Moderate |
| $450,000 | 6.67% | Moderate |
| $500,000 | 6.00% | Moderate |
Run the formula backwards to find your maximum price. At $30,000 of NOI, a 7% target means paying no more than $428,571; an 8% target means $375,000.
Interpreting the Number
Higher cap rate means more income per dollar of price — and usually more risk, because the market discounts what it is wary of:
| Cap Rate | Band | What It Usually Signals |
|---|---|---|
| Under 4% | Very Low | Priced for appreciation or safety rather than income |
| 4–6% | Low | High-demand urban markets, newer buildings, lower perceived risk |
| 6–8% | Moderate | Stable residential and small commercial; middling income and risk |
| 8–10% | High | Stronger income, usually with an older building or weaker location |
| Above 10% | Very High | Verify the income is real — often vacancy risk or deferred maintenance |
These are conventions, not rules. Cap rates are intensely local: a 5% cap in a prime metro and a 5% cap in a declining rural market describe completely different propositions. Compare only against similar properties in the same market.
Why the Mortgage Is Left Out
This surprises people, and it is the most common objection to the metric: your mortgage is a real cost, so why ignore it? Because cap rate answers a question about the building, not about you.
Two buyers purchase the same $400,000 property producing $30,000 of NOI. One pays cash; the other borrows 75%. Both have a 7.50% cap rate — identical, because neither the price nor the income changed. Their cash-on-cash returns differ enormously, but that is a fact about their financing, not about the property.
If cap rate included debt service, every buyer would compute a different number for the same building, and the metric would be useless for comparing properties. To understand your own return after financing, you want cash-on-cash return or total return — different tools for a different question.
Benefits of Using the Cap Rate Calculator
Example Calculations
Three properties worked through step by step:
Example Scenario 1 — From Income and Expenses
Property value $400,000, gross rental income $48,000, operating expenses $18,000.
NOI = Gross Rental Income − Operating Expenses
NOI = $48,000 − $18,000 = $30,000
Cap Rate = (NOI ÷ Property Value) × 100
Cap Rate = ($30,000 ÷ $400,000) × 100 = 7.50%
Expenses are 37.5% of gross income, leaving 62.5% as NOI
Result: 7.50% — a Moderate cap rate, $2,500 of NOI per month
Example Scenario 2 — NOI Entered Directly
Property value $250,000, NOI $18,000.
NOI is already known, so no expense breakdown is needed
Cap Rate = (NOI ÷ Property Value) × 100
Cap Rate = ($18,000 ÷ $250,000) × 100 = 7.20%
That is $1,500 of NOI per month
You are paying $13.89 of price for every $1 of annual NOI
Result: 7.20% — a Moderate cap rate
Example Scenario 3 — A Lower-Yielding Property
Property value $600,000, NOI $36,000.
Cap Rate = ($36,000 ÷ $600,000) × 100 = 6.00%
That is $3,000 of NOI per month
Price per dollar of annual NOI is $16.67, versus $13.33 in Example 1
The same $36,000 of NOI would be a 9.00% cap at a $400,000 price
Result: 6.00% — still Moderate, but priced for a lower yield
What Cap Rate Does Not Tell You
Cap rate is a single-year, unlevered snapshot. It has no view on appreciation, which for many investors is the larger part of the return. It excludes capital expenditure by convention, so the roof, boiler and repipe you will eventually fund sit entirely outside the number — budgeting a reserve will push your actual return below the stated cap rate. It ignores your financing terms and your tax position. And it is only as good as the income figures behind it: a seller's pro forma showing full occupancy and optimistic rents can turn an ordinary building into an attractive one on paper. Rebuild the expense side from your own assumptions, compare only against similar properties in the same market, and treat the result as a first filter rather than a decision. This is general information, not investment advice.
Frequently Asked Questions
- What is a cap rate?
- Capitalization rate is a property's annual net operating income as a percentage of its value. A property worth $400,000 producing $30,000 of NOI has a 7.50% cap rate. It expresses what the property yields in a year, independent of how it was financed.
- How do you calculate cap rate?
- Divide net operating income by the property value and multiply by 100. NOI itself is gross rental income minus operating expenses — so $48,000 of rent less $18,000 of expenses gives $30,000, and $30,000 ÷ $400,000 × 100 = 7.50%.
- Why does NOI exclude the mortgage?
- Deliberately, so the number describes the property rather than the buyer. Two investors paying the same price for the same building get the same cap rate whether one pays cash and the other borrows 75%. Including debt service would make the figure incomparable between buyers.
- What is a good cap rate?
- It depends entirely on the market. Roughly, under 4% is very low, 4–6% low, 6–8% moderate, 8–10% high and above 10% very high. But a 5% cap in a prime metro and a 5% cap in a declining rural market mean completely different things, so compare only against similar properties nearby.
- Does a higher cap rate mean a better investment?
- Not on its own. A higher cap rate means more income per dollar of price, which usually means the market is discounting something — an older building, a weaker location, shorter leases or vacancy risk. Higher yield and higher risk tend to arrive together.
- What counts as an operating expense?
- Property taxes, insurance, maintenance and repairs, property management, utilities you pay, and a vacancy allowance. Not included: mortgage payments, income tax, depreciation, or capital expenditure such as a new roof.
- What if I understate my expenses?
- The cap rate inflates quickly. Trimming just $4,800 from $18,000 of expenses — a 10% understatement of gross income — moves the Example 1 figure from 7.50% to 8.70%. That 1.2 point gap is the difference between a moderate and a high cap rate on a property that has not changed at all.
- How does the purchase price change the cap rate?
- Inversely, and sharply. The same $30,000 of NOI is a 10.00% cap at $300,000, 7.50% at $400,000 and 6.00% at $500,000. Since you control the price you pay but not the income the building produces, price is the lever most within your control.
- Can a cap rate be negative?
- Yes. If operating expenses exceed gross income, NOI is negative and so is the cap rate — a property grossing $20,000 against $32,000 of expenses has a −4.00% cap rate at a $300,000 value. The property loses money before any mortgage payment is considered.
- What does cap rate leave out?
- A great deal. It ignores appreciation, financing terms, tax treatment, and capital expenditure — a roof or a boiler is excluded from NOI by convention but is very real money. It is also a single-year snapshot that assumes the income is accurate and sustainable.