Cap Rate Calculator
Income & price
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Fill in the fields on the left and this updates as you type.
Know what this estimate is based on
- Jurisdiction
- United States — state and local practice
- Scope and limitations
- Educational estimate only. U.S. real estate costs are local: property tax rates, transfer and recording taxes, title practice, who customarily pays which closing cost, and landlord-tenant rules all change by state and often by county or city. Agent commission is negotiable and, since the 2024 NAR settlement, buyer-agent compensation is negotiated separately rather than assumed. Only a lender's Loan Estimate, a title company's fee sheet or a signed contract binds a number.
- Source links checked
- Jul 30, 2026
Built and regression-tested by Smart Tools Lab. It has not been individually reviewed by a licensed financial, tax, or legal professional.
How to use
- 01
Enter the purchase price or the current value, and the monthly rent.
- 02
Enter the annual operating expenses — tax, insurance, repairs, management. Exclude the mortgage; cap rate is deliberately debt-free.
- 03
Set the vacancy allowance, which applies to rent but not to parking or laundry income.
- 04
Set the cap rate you are aiming for, and the page reports what the property would be worth at it.
- 05
Read the table: the same income priced at cap rates from 4% to 10%, which is how a valuation actually moves.
Formula
Effective gross income is annual rent reduced by the vacancy allowance, plus other income — vacancy applies to rent, not to parking or laundry, which do not stop when a unit turns over. NOI is that income minus annual operating expenses. Cap rate is NOI divided by the property value, expressed as a percentage, and renders as a dash rather than a number when the value is zero. The implied value at your target is NOI divided by the target rate, which is the same equation solved for price — this is why the target keeps its default with a floor of one percent, since a zero target makes the implied value infinite. The NOI gap is what income would have to be to hit your target at the current price, and the required rent works backwards from that through the expense and vacancy figures.
Example
A $265,000 property renting for $2,400 a month, $10,700 of annual operating expenses, a 5% vacancy allowance and $600 of other income. Step 1 — Gross rent: $2,400 x 12 = $28,800. Step 2 — Effective gross income: $28,800 x 0.95 + $600 = $27,960. Step 3 — NOI: $27,960 − $10,700 = $17,260. Step 4 — Cap rate: $17,260 / $265,000 = 6.5%. Step 5 — At a 6% target the same income supports $17,260 / 0.06 = $287,667 — about $22,700 above the asking price. So this property clears the target with room. Now the part worth understanding. Hold the income fixed and read the table: at 5% the property is worth $345,200, at 8% it is worth $215,750. Nothing about the building changed — the same tenant, the same rent, the same roof. Cap rates move with interest rates, and when they rise a property loses value without a single thing going wrong. That is the risk a cap rate quietly measures, and it is why a deal that only works at today's rates is a bet on rates.
Definitions
- Capitalization rate
- Net operating income divided by property value. The unlevered yield.
- Net operating income
- Effective gross income minus operating expenses, before any mortgage.
- Effective gross income
- Rent after a vacancy allowance, plus other income like parking or laundry.
- Operating expenses
- Tax, insurance, repairs, reserves, management and utilities you pay. Never the mortgage.
- Expense ratio
- Operating expenses as a share of effective gross income, commonly 35% to 50%.
- Implied value
- NOI divided by a target cap rate — the most the income supports at that yield.
- Unlevered return
- The return with no debt. What cap rate measures, and why it compares properties rather than deals.
- Gross rental yield
- Annual rent divided by price, with no expenses deducted. A flattering and less useful figure.
- Net rental yield
- The same arithmetic as cap rate, under a British name.
- Cap rate compression
- Market cap rates falling, which raises values without any change in income.
- Cap rate expansion
- Market cap rates rising, which lowers values. What rising interest rates do to property prices.
- Stabilized NOI
- Income once the property is fully leased at market rents — the basis a cap rate should be applied to.
Good to know
A price, expressed as a yield
The capitalization rate is net operating income divided by price, and its real function is to convert an income stream into a value. An NOI of $17,260 at a 6.5% cap rate is a $265,000 property; the same income at a 6% cap rate is worth $287,667. That relationship runs in both directions and it is how commercial real estate is valued generally — not from comparable sale prices, as residential appraisal works, but from income divided by the yield the market demands. It also means cap rates and values move inversely: when required yields rise, as they did sharply through 2022 and 2023, prices fall on unchanged income. An investor who bought at a 4.5% cap rate in 2021 and needs to sell into a 6.5% market is selling a property worth roughly two-thirds of what they paid, with the income unchanged.
What belongs in NOI and what never does
Net operating income is gross rent plus other income, less operating expenses — property tax, insurance, management, maintenance, utilities the owner pays, HOA dues, and a vacancy allowance. It excludes three things by definition, and the exclusions are what make cap rates comparable. Mortgage principal and interest are out, because financing is the buyer's choice rather than the property's characteristic. Depreciation is out, because it is a tax entry rather than a cash cost. And capital expenditure is out, because a new roof is an investment in the asset rather than a cost of operating it — though the honest analyst reserves for it anyway. The operating expense ratio here is 38.3%, which is toward the low end; 35% to 50% is the usual range for residential rentals, and anything materially under 30% generally means something was left out.
Why a good cap rate is a local question
There is no universal target. Cap rates are set by what buyers in a specific market will accept for a specific asset class, and they compress where growth is expected and expand where risk is. Class A apartments in a coastal metro trade at yields several points below a Class C building in a slow-growth secondary market, and the low yield is not a bad deal — it reflects lower vacancy, lower expense volatility and stronger rent growth. The comparison that matters is against the ten-year Treasury: the gap between a cap rate and the risk-free rate is the spread investors demand for taking on tenants, repairs and illiquidity. When that spread narrows toward zero, as it did during the low-rate years, real estate is priced for perfection. A 6.5% cap rate against a Treasury near 4% is a roughly 250 basis point spread, which is historically thin but not extreme.
Pro forma cap rates and the numbers behind them
The cap rate a listing advertises is frequently a pro forma figure — computed on the income the property would produce if every unit were rented at market rate with the seller's assumed expenses. The actual cap rate, computed on the trailing twelve months of real collections and real bills, is usually lower and sometimes dramatically so. The gaps to look for are vacancy assumed at 3% when the building has run at 8%, management omitted because the seller self-manages, maintenance set at a round number rather than the actual invoices, and property tax carried at the seller's assessed value when a sale will trigger reassessment in your state. That last one is the most expensive and the most common. Ask for two years of operating statements, the rent roll with lease dates, and the tax bill — and compute the cap rate yourself from those, not from the marketing sheet.
Using the target rate in reverse
The most practical use of a cap rate is as an offer tool. Decide the yield you require, and the income tells you the price. At a 6% target the $17,260 of NOI supports $287,667, so a $265,000 asking price clears the requirement with room to spare. Turn it around and the same target says what rent would be needed at a given price — here $2,281 a month against the $2,400 actually collected. Both framings convert a vague sense that a property is expensive into a specific number you can put in an offer and defend. And when a seller argues the price, the argument is about the inputs to NOI rather than about the price itself, which is a far more productive negotiation: agreeing what the taxes and vacancy really are settles the value automatically.
Frequently asked questions
What is a cap rate?
Net operating income divided by price. It is the unlevered yield on a property — what it would return if you paid cash. Because it ignores financing, two buyers with different loans get the same cap rate for the same building, which is exactly what makes it a comparison tool.
What is a good cap rate?
There is no universal answer, and anyone who gives one is selling something. Class A apartments in coastal metros trade at 4% to 5%; secondary-market single family often runs 6% to 8%; higher rates usually mean higher risk, older stock or a weaker market, not a better deal.
Why does cap rate move inversely to value?
Because it is a yield. The same $16,000 of income is worth $320,000 at 5% and $200,000 at 8%. When market cap rates rise — as they do when interest rates rise — values fall even if nothing about the building changed. That relationship is the single most important thing on this page.
Should I use asking price or my offer?
Both, at different times. The asking price tells you the cap rate the seller expects. Your offer tells you the cap rate you would earn. The implied-value figure works backwards: at your target cap rate, this is the most the income supports.
Do I include the mortgage in expenses?
No. Cap rate is defined without financing, and including the payment turns it into a different metric that cannot be compared with any published cap rate. If you want the financed view, that is cash-on-cash return.
What operating expenses belong here?
Property tax, insurance, repairs and maintenance, reserves, management, utilities you pay, and HOA. Not the mortgage, not depreciation, not capital improvements that add value rather than maintain it.
What is a typical expense ratio?
Operating expenses commonly run 35% to 50% of effective gross income for US residential rentals. Below 30% usually means something is missing from the list — management and reserves are the two most often left out.
Is cap rate the same as rental yield?
Net rental yield is the same arithmetic under a British name. Gross rental yield is different and much more flattering — it divides rent by price with no expenses removed. If a listing quotes a yield without saying which, assume gross.
Does cap rate work for single-family homes?
It works arithmetically, but single-family values are set by what owner-occupiers will pay rather than by income, so the cap rate is often a poor guide to price. It is far more reliable on multifamily and commercial, where income actually drives valuation.
How do I use the target cap rate?
As a price ceiling. If you need a 6% cap and the NOI is $17,260, the most you can pay is $287,667. Anything above that is a rate below your target, whatever the listing says.
Why is my cap rate higher than the market?
Either you found value, or your expense figure is too low, or the rent is above market and will not renew. Check the second and third before celebrating the first — an optimistic expense number is the most common source of an attractive cap rate.
Does cap rate account for appreciation?
No. It is a snapshot of current income against current price, and says nothing about growth. That is why low-cap-rate markets are not simply worse — buyers there are pricing in appreciation the cap rate cannot see.