Cap Rate Calculator
Cap rate is net operating income divided by property value (cap rate = NOI ÷ value × 100), so it shows the unlevered annual return a property produces before any mortgage.
Last updated: · by MakeLease Editorial Team
| Gross potential income | $29,400 |
| Less vacancy (5.0%) | −$1,470 |
| Effective gross income | $27,930 |
| Less operating expenses | −$10,500 |
| Net operating income | $17,430 |
The calculator is free to use without an account. Saving and comparing deals needs a free account.
How it's calculated
NOI = (monthly rent + other income) × 12 − vacancy − operating expenses
Cap rate = NOI ÷ property value × 100
- Gross potential income is a full year of rent plus other income such as laundry, parking or pet rent, as if every unit were occupied and every tenant paid.
- Vacancy and credit loss is the share of that income you expect to lose to empty months and unpaid rent. Subtracting it gives effective gross income.
- Operating expenses are the costs of running the property: property taxes, insurance, maintenance and repairs, property management, landlord-paid utilities, HOA dues, and similar recurring costs.
- What stays out of NOI: mortgage principal and interest, depreciation, income taxes, and one-time capital improvements like a new roof or a kitchen remodel. Some investors set aside an annual reserve for future replacements and count it as an expense. If you do, do it for every property you compare.
- Property value is the purchase price when you are analyzing a deal, or a current market value estimate for a property you already own.
The calculator also shows the gross rent multiplier (price ÷ gross annual rent), a rougher screen that ignores vacancy and expenses, and the value at a target cap rate (NOI ÷ target cap rate), which turns the formula around to give you a price.
Worked example
The calculator above is pre-filled with a single-family rental priced at $300,000, renting for $2,400 a month with $50 a month of other income.
- Gross potential income: ($2,400 + $50) × 12 = $29,400.
- Vacancy at 5%: $1,470, leaving effective gross income of $27,930.
- Operating expenses: $3,600 taxes + $1,500 insurance + $2,400 maintenance + $2,400 management + $600 other = $10,500.
- NOI: $27,930 − $10,500 = $17,430.
- Cap rate: $17,430 ÷ $300,000 × 100 = 5.81%.
- Gross rent multiplier: $300,000 ÷ $28,800 = 10.42x.
- If you want a 7% cap rate on this NOI, the most you could pay is $17,430 ÷ 0.07 = $249,000, which is $51,000 below the asking price.
That last line is how many buyers use cap rate in practice: they decide what return the income must support, then work back to a price instead of starting from the asking price.
What's a good cap rate?
There is no single good cap rate. It depends on the market, the property and how certain the income is. A cap rate is most useful when you compare it with recent sales of similar properties in the same area, which an appraiser, broker or lender can help you find.
What tends to push a cap rate up or down:
- Risk. Buyers pay more per dollar of income for properties they see as safer: newer buildings, strong tenant demand, stable neighborhoods. Higher prices mean lower cap rates. Riskier income usually sells at a higher cap rate.
- Interest rates. When borrowing costs rise, buyers usually need more income from each dollar of price, which tends to push cap rates up over time.
- Condition and upside. A property that needs work, or has rents below market, may show a high cap rate on paper while the real return depends on what you spend to fix it.
One practical check: compare the cap rate with your mortgage rate. If the cap rate is below the rate on your loan, borrowing will usually lower your cash return rather than raise it. The cash-on-cash return calculator shows that effect with your real financing.
Common mistakes
- Subtracting the mortgage payment from NOI. That turns cap rate into a cash flow figure and makes financed and cash deals impossible to compare.
- Using the seller's numbers without checking them. Listing sheets often leave out management, vacancy or repairs, which inflates NOI.
- Using last year's property tax bill. Many areas reassess after a sale, so your taxes as the new owner may be higher.
- Leaving out vacancy because the unit is rented today. Even a well-run rental has turnover and the occasional late or missed payment.
- Comparing cap rates across very different properties or markets and treating the higher one as the better deal.
- Using cap rate alone. It ignores financing, the price of repairs you need to make, appreciation and tax effects.
Cap rate vs. cash-on-cash return
Cap rate measures the property. Cash-on-cash return measures your deal. Cap rate divides NOI by the whole property value, so it is the same whether you pay cash or borrow 80%. Cash-on-cash divides your annual cash flow after the mortgage by the cash you actually put in: down payment, closing costs and upfront repairs.
Use cap rate to screen and compare properties and to sanity-check a price. Use cash-on-cash to decide whether the deal works with the loan you can get. Neither one counts loan paydown, appreciation or taxes, so for a full picture you also need a longer-term projection. The rental property calculator puts these side by side.
Frequently asked questions
- Does cap rate include the mortgage payment?
- No. Cap rate is calculated before debt service, as if you paid all cash. Mortgage principal and interest are left out of NOI so you can compare properties regardless of how each buyer finances them. To see the effect of a loan, use cash-on-cash return or a cash flow calculation.
- Should I use the purchase price or the market value?
- Use the price you would pay when you are evaluating a purchase, and a current market value estimate when you are judging a property you already own. Be consistent when you compare properties, and say which one you used.
- Is a higher cap rate always better?
- Not by itself. A higher cap rate means more income per dollar of price, but it often comes with more risk: an older building, weaker tenant demand, or income that is less certain. A lower cap rate can reflect a stable property in a strong location. Compare cap rates between similar properties in the same area.
- How is cap rate different from gross rent multiplier?
- Gross rent multiplier is price divided by gross annual rent. It ignores vacancy and expenses, so it is a quick screen only. Cap rate uses NOI, so two properties with the same rent but very different taxes or insurance will show different cap rates.
- How do I use a target cap rate to set an offer price?
- Divide the NOI by the cap rate you want, written as a decimal. If a property's NOI is $18,000 and you want a 7% cap rate, the price that gets you there is $18,000 ÷ 0.07, or about $257,143. Any price above that gives you a lower cap rate.
Further reading
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