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Calculator Answers

Cap Rate Calculator

Blake Boege
Written by Blake Boege · Founder, Calculator Answers

A cap rate calculator is a real estate investment tool used to evaluate the profitability and potential return of a commercial or residential income-producing property. Capitalization rate is calculated by dividing the property's net operating income (NOI)—which is gross rental income minus vacancy allowances and operating expenses—by the property's current market value or purchase price. The resulting percentage represents the expected unleveraged rate of return. Real estate agents, investors, and underwriters use this tool to compare properties, analyze market capitalization rates, and determine reasonable purchase prices.

Choose whether to compute the cap rate from a property's price or back into property value from NOI and a target cap rate. Enter gross income, vacancy allowance, and operating expenses; the calculator returns NOI and the cap rate.

See also: Rent vs Buy Calculator, Property Tax Calculator, and Net Effective Rent Calculator.

Quick Answer

Calculate the capitalization rate or property value for real estate. Enter the net operating income (NOI) and property value to see the yield.

Solve for
$

e.g. 400,000

$

Total rent and other property income at full occupancy. · e.g. 48,000

%

Expected vacancy and collection loss. · e.g. 5

$

Taxes, insurance, management, repairs, utilities you pay. · e.g. 12,000

What NOI excludes

Net operating income does not include mortgage payments, depreciation, income tax, or capital expenditures. Debt service is a financing decision, not an operating one. Cap rate is a property-level yield; cash-on-cash return is the leveraged yield.

Educational tool only. Not real estate, investment, tax, or legal advice.

Cap rate

Capitalization rate

8.4%

NOI $33,600.00 on a $400,000.00 property

Gross annual income$48,000.00
Vacancy allowance (5%)$2,400.00
Effective gross income$45,600.00
Operating expenses$12,000.00
Net operating income (NOI)$33,600.00
Property value$400,000.00
Cap rate8.4%

Cap rate is NOI divided by property value. A higher cap rate usually signals more perceived risk or a higher-yield market; lower cap rates show up in stable, in-demand locations.

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Examples

$400,000 property · $48,000 gross · 5% vac · $12,000 exp

NOI $33,600 · cap 8.40%

$1.2M property · $120,000 gross · 7% vac · $35,000 exp

NOI $76,600 · cap 6.38%

Target 7% cap · $48,000 gross · 5% vac · $12,000 exp

Value ≈ $480,000

$250,000 property · $24,000 gross · 8% vac · $6,000 exp

NOI $16,080 · cap 6.43%

How it works

Cap rate is a property-level yield. The calculator builds NOI from gross income, vacancy, and operating expenses, then divides by property value (or solves for property value given a target cap).

Effective income · gross_income × (1 − vacancy%)

NOI · effective_income − operating_expenses

Cap rate · NOI / property_value × 100

Implied value · NOI / target_cap_rate%

NOI excludes debt service, depreciation, income tax, and capital expenditures by definition.

The whole calculation, in three lines

There is no hidden model here. Everything on this page comes from three steps, and the third is a single division.

effective income = gross × (1 − vacancy)
NOI = effective income − operating expenses
cap rate = NOI ÷ property value

The second mode rearranges the last line rather than doing anything new: value = NOI ÷ cap rate. All the difficulty in a cap rate lives in what you put into NOI, which the next section is about.

What NOI includes, and the four things it does not

This is where the number actually goes wrong. NOI is a property-level figure: what the building earns after the cost of running it, and before anything to do with the owner.

In

  • Property taxes and insurance
  • Management, whether paid out or done yourself
  • Maintenance and repairs
  • Utilities the owner pays
  • A vacancy allowance

Out

  • Mortgage principal and interest
  • Income tax
  • Depreciation
  • Capital expenditure

The management line catches people out. Doing the work yourself does not make it free; it makes it unpaid, and a cap rate that leaves it out is comparing a building you work at against buildings someone else manages.

Working one out by hand

A $400,000 property, $48,000 of gross rent, a 5% vacancy allowance, $12,000 of operating expenses.

  1. Take the vacancy off the gross. 48,000 × 0.05 = 2,400, so effective income is 45,600.
  2. Take off operating expenses. 45,600 − 12,000 = 33,600. That is the NOI.
  3. Divide by the price. 33,600 ÷ 400,000 = 0.084, which is 8.40%.
  4. Sanity-check it the other way. At an 8.4% cap, $33,600 of NOI implies 33,600 ÷ 0.084 = 400,000. The two modes are the same equation.

What the mortgage does to this number

Subtracting debt service is the most common way a cap rate comes out wrong, and the effect is not subtle. Take the same building with $24,000 a year of principal and interest:

FigureCorrectWith debt wrongly deducted
NOI$33,600$9,600
Cap rate8.40%2.40%

Nothing about the building changed. If a property you know to be ordinary produces a startlingly low cap rate, check this first.

Why the second mode is so sensitive

Valuing from a target cap puts the rate in the denominator, so a small change in the rate is a large change in the answer. At $33,600 of NOI:

  • 6% implies $560,000
  • 7% implies $480,000
  • 8% implies $420,000

One percentage point is $80,000 on this building. Any argument about the right cap rate for a valuation is an argument about that much money, which is worth knowing before having it.

Edge cases

  • A property value of zero. Refused. The cap rate is a division by that value, and there is no answer rather than a very large one.
  • Expenses above effective income. Allowed, and the result is a negative NOI and a negative cap rate. That is a real state for a building to be in, and the page reports it rather than hiding it behind an error.
  • Zero vacancy. Allowed. It assumes the building is never empty, which is a choice rather than a default, and it raises the cap rate by exactly the allowance you dropped.
  • Pre-reduced income. If you enter income you have already taken vacancy off, the allowance is applied twice. Enter the gross rent roll.
  • A target cap rate of zero. Refused in the valuation mode, for the same reason as a zero price: an income stream at a zero yield implies an unbounded value.

What this page will not tell you

It computes a ratio from figures you supply. It does not say whether a cap rate is good, whether a property is worth buying, or what rate is normal where you are looking. Those depend on the submarket, the condition of the building, the lease terms and what else you could do with the money, none of which this arithmetic can see.

It also does not model appreciation, rent growth, tax treatment or what the building eventually sells for. A cap rate is one year, one price, operations only.

Your figures stay in this page

The price, income, vacancy and expense figures you enter are computed by this page in your browser. Nothing is sent to a server, nothing is stored after you close the tab, and there is no account.

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Disclaimer. Cap rate is a single, unleveraged metric. It is not a complete valuation or underwriting model and does not capture financing, depreciation, taxes, location risk, capital expenditures, or growth assumptions. Not real estate investment, tax, or legal advice.

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Frequently asked questions

The capitalisation rate is a property's net operating income divided by its value, expressed as a percentage. It is a yield on the property itself, before any financing. A property producing $33,600 of NOI and worth $400,000 has an 8.4% cap rate, which says the building returns 8.4% of its price each year on operations alone.

Take gross annual income, subtract a vacancy allowance, subtract annual operating expenses, and divide the result by the property value. On $48,000 gross with 5% vacancy and $12,000 of expenses: 48,000 minus 2,400 minus 12,000 is $33,600 of NOI, and 33,600 divided by 400,000 is 8.4%.

It includes everything the building costs to run: property taxes, insurance, management, maintenance and repairs, utilities the owner pays, landscaping, and a vacancy allowance. It EXCLUDES four things, and getting those wrong is where most cap-rate figures go astray: mortgage principal and interest, income tax, depreciation, and capital expenditure. NOI is a property-level figure, not an owner-level one.

Because the cap rate is meant to describe the building rather than the buyer. Two people buying the same property with different down payments and different rates have the same cap rate and completely different cash flow, and that is the point: it lets you compare buildings without every comparison being distorted by whoever happens to be financing them. Subtracting debt service gives a different and also useful number, but it is not a cap rate.

The figure collapses, often by more than half, and it stops being comparable to any published cap rate. On the $400,000 example, a mortgage costing $24,000 a year would take NOI from $33,600 to $9,600 and the rate from 8.4% to 2.4%. Nothing about the building changed. If you see a surprisingly low cap rate on a property that seems fine, this is the first thing to check.

Not by the standard definition, and this is the most defensible disagreement in the whole calculation. A new roof is a capital item rather than an operating one, so it sits outside NOI. Many investors nonetheless subtract a reserve, often a few percent of income, on the grounds that roofs are not optional. Both are reasonable; what matters is that you know which you did, because a cap rate with a capex reserve in it is not comparable to one without.

Effective, which is gross less the vacancy allowance. A building that is never fully let does not earn its gross figure, and using gross inflates the cap rate by exactly the vacancy percentage. This calculator applies vacancy for you, so enter the gross rent roll rather than a figure you have already reduced, or the allowance is taken twice.

This page cannot tell you, because it depends on the submarket, the property type and the season, and no national figure substitutes for the one where the building is. What the arithmetic can tell you is how much it matters: on the $48,000 example, moving from 5% to 10% vacancy takes NOI from $33,600 to $31,200 and the cap rate from 8.4% to 7.8%.

That is a question about your market and your risk tolerance rather than about arithmetic, and this page takes no position on it. What can be said without asserting anything: cap rates move opposite to price, so a higher one means you are paying less per dollar of income, and that is usually compensation for something. Comparing a cap rate to those of similar buildings in the same submarket is the only comparison that carries information.

Cap rate divides NOI by the property's full value and ignores financing. Cash-on-cash divides the cash left after debt service by the cash you actually put in. They answer different questions: the first asks what the building yields, the second asks what your money yields. A leveraged purchase can have a modest cap rate and a strong cash-on-cash return, or the reverse.

That is what the second mode does. Rearranged, value equals NOI divided by the cap rate, so $33,600 of NOI at a 7% target implies $480,000. This is how commercial property is commonly priced, and it is only as good as the two inputs: an NOI that quietly omits management or a cap rate borrowed from a different submarket will produce a confident and useless number.

Because the rate is in the denominator. At $33,600 of NOI, a 7% target gives $480,000 and a 6% target gives $560,000, so one percentage point is $80,000. The same NOI at 8% is $420,000. This is why arguments about the right cap rate in a valuation are really arguments about a large amount of money.

No. It is a snapshot of one year's operating yield at one price. Appreciation, rent growth, and what the building sells for later are all outside it. A property can have an unremarkable cap rate and still be the better purchase on other grounds, and the calculation here will never say so.

Because the cap rate is NOI divided by value, and dividing by zero has no answer. The same applies to a target cap rate of zero in the second mode: a building producing income at a zero yield would have to be worth an infinite amount, which is arithmetic rather than a market view.

No. The price, income, vacancy and expense figures are computed by this page in your browser. Nothing is sent to a server, nothing is kept after you close the tab, and there is no account.