Cap Rate Calculator
Find a property’s capitalization rate from its price and net operating income — or flip it and estimate what a building is worth at the cap rate the market is paying.
Formula: $19,840 ÷ $350,000 = 5.67%
Why value and cap rate move in opposite directions
Value is NOI divided by the cap rate. Because the cap rate sits underneath the fraction, a small change in the market’s cap rate moves value a lot — which is why rising interest rates (which push cap rates up) can knock value off a building whose rent never changed.
Building value
$400,000
Raise rent enough to add just $100 a month of NOI and, at a 6.00% cap, the building is worth about $20,000 more. That’s the lever value-add investors pull.
How to calculate cap rate, step by step
- Start with a full year of scheduled rent, plus other income (parking, laundry).
- Subtract a vacancy and credit-loss allowance — 5–8% is typical for residential.
- Subtract operating expenses: property tax, insurance, repairs, reserves, management, owner-paid utilities, HOA. Not the mortgage, not depreciation, not income tax.
- What’s left is NOI. Divide by price (or current value) and multiply by 100.
What is a good cap rate?
A good cap rate is one that fairly pays you for the risk. Broker surveys such as CBRE’s semi-annual U.S. Cap Rate Survey consistently show lower cap rates for newer buildings in large coastal metros and higher ones for older assets in smaller markets. Two practical tests:
- Against your mortgage rate. If the cap rate is below your loan’s interest rate, borrowing lowers your return (negative leverage). The cash-on-cash calculator shows the effect.
- Against comparable sales. A listing advertised at a 9% cap in a 6% neighbourhood usually has understated expenses or a problem the seller isn’t advertising. Rebuild the NOI yourself.
Questions investors ask
What is a cap rate?
The capitalization rate is a property’s net operating income (NOI) for one year divided by its price or current value. It is the return you would earn if you bought the property with all cash, which makes it a financing-neutral way to compare properties.
How do you calculate cap rate?
Cap rate = NOI ÷ property value × 100. NOI is gross rent minus vacancy and operating expenses (taxes, insurance, maintenance, management, utilities you pay), but not the mortgage, depreciation or income tax. A property with $18,000 NOI bought for $300,000 has a 6% cap rate.
What is a good cap rate?
There is no single good number. Stabilised apartments in large, expensive metros often trade around 4.5–6%, while single-family rentals and small multifamily in smaller markets often sit at 6–9% or higher. A higher cap rate means more income per dollar but usually more risk: older buildings, weaker tenants or slower-growing areas. Compare against recent sales of similar properties in the same submarket.
Does cap rate include the mortgage?
No. Cap rate deliberately ignores financing so two investors with different loans can agree on what the property itself earns. To see returns with your loan, use cash-on-cash return or DSCR.
How do I value a property from a cap rate?
Rearrange the formula: value = NOI ÷ cap rate. If similar buildings trade at a 6.5% cap and yours produces $26,000 NOI, it is worth roughly $26,000 ÷ 0.065 = $400,000. This is how commercial appraisers use the income approach.