Cap Rate Calculator
Cap rate ignores financing. To see whether the rent covers a loan, compare NOI with the yearly debt payments (DSCR).
How the cap rate calculation works
Start from gross rent and take off vacancy
$120,000 of yearly rent with 5% vacancy leaves $114,000 of effective income.
Subtract operating expenses to get NOI
Taxes, insurance, repairs and management of $36,000 leave a net operating income of $78,000. Loan payments, depreciation and income tax are not operating expenses.
Divide NOI by the price
Cap rate = NOI ÷ property value. $78,000 ÷ $1,200,000 = 6.50%.
Or divide NOI by a cap rate to get a value
Value = NOI ÷ cap rate. If buyers in your market pay a 7% cap rate, $78,000 of NOI supports a price of $1,114,285.71.
Worked example. A building priced at $1,200,000 earns $120,000 a year in rent. After 5% vacancy and $36,000 of operating expenses, NOI is $78,000, so the cap rate is 6.50%. At a 7% cap rate, the same income would justify a price of $1,114,285.71.
Cap Rate FAQ
What is cap rate?
Cap rate (capitalization rate) is a property's yearly net operating income as a percentage of its price or value. It shows the return the property would give in a year if you bought it with cash, before any loan.
How do you calculate cap rate?
The cap rate formula is net operating income ÷ property price or current value. A property with $78,000 of NOI selling for $1,200,000 has a 6.5% cap rate.
What is a good cap rate?
There is no single good number. Cap rates depend on the property type, location, tenant quality, lease length and interest rates, so a figure that is normal for one building can be poor for another. Compare your result with the cap rates on recent sales of similar properties in the same area, which a local broker or appraiser can give you, and make sure you calculate NOI the same way they do.
Is a higher cap rate better?
A higher cap rate means more income for each dollar of price, but it often comes with more risk, such as weaker tenants, an older building or a smaller market. A lower cap rate means buyers pay more for the same income. At $78,000 of NOI, a 6% cap rate values the property at $1,300,000 and an 8% cap rate at $975,000.
Do mortgage payments count in the cap rate?
No. Cap rate measures the property's income as if bought with cash, so loan payments are left out. Use DSCR or cash-on-cash return to judge the deal with financing.
How do I calculate the cap rate on a rental property?
Add up a year of rent, subtract an allowance for vacancy, then subtract property taxes, insurance, repairs, management and any utilities you pay. Divide what's left by the price.
What is the gross rent multiplier?
The gross rent multiplier is the price divided by gross yearly rent. A $1,200,000 building with $120,000 of rent has a GRM of 10. It is quicker than a cap rate but ignores vacancy and expenses.
How do I value a property from a cap rate?
Divide NOI by the cap rate as a decimal. $78,000 ÷ 0.07 = $1,114,285.71. A lower cap rate gives a higher value for the same income.