The capitalization rate is the quickest yardstick in income real estate. It boils a property down to one number, the income it produces relative to its price, so you can compare a fourplex with a strip mall or one listing with the last three sales. This cap rate calculator builds net operating income from rent, vacancy and itemized expenses. It then either computes the cap rate at a given price or estimates value from a market cap rate.
How to use the cap rate calculator
- Choose whether to find the cap rate (you know the price) or the property value (you know the market cap rate).
- Enter the gross scheduled rent for all units at full occupancy, plus any other income.
- Enter a vacancy and credit loss allowance. 5% to 8% is common for residential.
- Enter yearly operating expenses: property taxes, insurance, repairs and maintenance, management as a percentage of collected income, owner-paid utilities and other costs such as HOA dues or reserves.
The cap rate formula
The calculator also reports the gross rent multiplier (price ÷ annual rent), a rougher screen that ignores expenses, and the expense ratio, operating expenses as a share of effective income. Residential rentals often run 35% to 50%.
Worked example
A fourplex is listed at $850,000. Rent totals $7,200 a month plus $150 of laundry and parking income. Vacancy is assumed at 5%.
- Gross scheduled income: $7,350 × 12 = $88,200
- Effective gross income: $88,200 − $4,410 vacancy = $83,790
- Expenses: taxes $10,500 + insurance $3,600 + repairs $5,200 + 8% management $6,703 + utilities $2,400 + other $2,500 = $30,903, or 36.9% of income
- NOI: $83,790 − $30,903 = $52,887
- Cap rate: $52,887 ÷ $850,000 = 6.22%
If similar buildings nearby sell at a 6.5% cap rate, this NOI supports a value of about $813,643, roughly $36,000 below the asking price.
Value sensitivity to the cap rate
| Cap rate | Value of $52,887 NOI |
|---|---|
| 5.0% | $1,057,736 |
| 6.0% | $881,447 |
| 6.5% | $813,643 |
| 7.0% | $755,526 |
| 8.0% | $661,085 |
Using cap rates well
- Verify the NOI. Seller listings often use pro-forma rents, low vacancy and missing expenses such as management or reserves. Rebuild NOI from leases, tax bills and insurance quotes.
- Compare like with like. Cap rates differ by property type, age, location and lease structure. Use recent sales of similar properties.
- Remember what is left out. A cap rate assumes an all-cash purchase. Your actual return depends on the mortgage, which the rental property calculator models through cash flow, cash-on-cash return and DSCR.
- Watch for property tax reassessment. A sale can trigger a new assessment. Estimate the new bill with the property tax calculator.
Depreciation, a major tax benefit of owning rentals, doesn’t affect NOI. The rental property depreciation calculator estimates it separately.
Estimates only, not investment advice. Market cap rates change with interest rates and local conditions; get a professional appraisal for financing or tax purposes.
Frequently asked questions
What is a cap rate?
The capitalization rate is a property's net operating income divided by its price or value. It is the yearly return you would earn if you bought the property with cash. A building with $52,887 of NOI priced at $850,000 has a 6.22% cap rate.
What is a good cap rate?
There is no single answer. Cap rates reflect risk and growth expectations. Newer properties in high-demand metros often trade at 4% to 6%, while older properties or slower markets may trade at 7% to 10% or more. A higher cap rate means more income per dollar but usually more risk or less expected appreciation.
Does NOI include the mortgage payment?
No. Net operating income is rental income minus vacancy and operating expenses such as taxes, insurance, repairs, management and owner-paid utilities. Mortgage payments, depreciation, income taxes and major capital improvements are left out, so cap rates compare properties regardless of how they are financed.
How do I estimate value from a cap rate?
Divide NOI by the market cap rate for similar properties. $52,887 of NOI at a 6.5% cap rate implies a value of about $813,643. Because NOI is divided by a small number, a half-point change in the cap rate moves the value by tens of thousands of dollars.