Cap Rate Calculator

What cap rate measures

Cap rate is the unlevered yield a property produces at its current operating performance. It answers one question: if you bought this property with cash and it performed exactly as modelled, what annual return would the income represent, before financing and before taxes?

Cap rate = Net operating income ÷ Purchase price

Because both terms are annual figures, a cap rate is a snapshot rather than a promise. It says nothing about how the property will perform next year, what the neighbourhood will look like in ten years, or what the building needs. It is a single number with a narrow, useful job: comparing income-producing properties on a like-for-like basis.

Net operating income, defined precisely

Most disagreements about cap rate come from net operating income, not from the division. This calculator uses the definition in the Appraisal Institute's income approach:

NOI = Effective gross income − Operating expenses
Effective gross income = Gross potential rent − Vacancy loss

Excluding capex is the lender convention and it is what this site follows, but it is worth being explicit about the consequence: a property can show a healthy NOI and still consume every dollar of it replacing a roof. That is why the rental cash flow calculator shows capex as a separate line rather than folding it into NOI.

A worked example

Take a $250,000 property renting for $2,000 a month with 5% vacancy, 8% management, 5% maintenance, $1,200 of annual insurance and $3,000 of property tax.

• Gross potential rent: $24,000
• Less 5% vacancy: −$1,200
• Effective gross income: $22,800
• Less operating expenses of $7,320 (management $1,920, maintenance $1,200, insurance $1,200, tax $3,000): NOI $15,480
• Cap rate: $15,480 ÷ $250,000 = 6.19%

Note what the 6.19% does not tell you. It does not account for the $1,200 of capex reserves, and it ignores financing entirely — with 25% down at 7.5%, this property actually loses roughly $121 a month after debt service and reserves. Two true statements, two different questions. Cap rate answers the property question; cash flow answers the cash question.

What cap rate cannot do

• It cannot compare markets. A low cap rate usually reflects expected appreciation or lower perceived risk, not a worse deal. Cross-market comparison requires assumptions cap rate does not contain.
• It cannot value a property that needs work. If the property is not stabilised, current NOI understates or overstates the stabilised figure.
• It cannot substitute for due diligence. Deferred maintenance, rent roll quality, and local regulation all sit outside this arithmetic.

What moves a cap rate

Cap rate is a ratio, so it moves whenever either side moves. The table below holds the $250,000 price fixed and changes one input at a time from the worked example above.

The two rent rows are the ones worth studying. A $200 change in monthly rent moves the cap rate by 0.79 points in either direction — almost three times the effect of raising vacancy from 5% to 8%. Rent is the largest single number in the calculation, and it is also the number most often based on a projection rather than a signed lease. When a cap rate looks attractive, the first question is whether the rent behind it is in place.

The expense rows matter for a different reason. Management and maintenance are calculated as a share of gross potential rent, so they move automatically when rent moves. Property tax and insurance are fixed dollar amounts, so a property carrying high taxes or insurance relative to its rent shows a lower cap rate than an otherwise identical property — and the gap does not shrink when the rent rises.

Why cap rates differ between markets and property types

A cap rate is a price, expressed as a yield. It reflects what buyers will pay for a stream of income, and buyers pay more — accepting a lower cap rate — when they expect the income or the resale value to grow, when they believe the risk is low, or when financing is cheap. The same building can trade at a 5% cap rate in one market and an 8% cap rate in another without either price being wrong.

Property type matters too. A single-family rental is bought by small investors, often with owner-occupied financing comparisons in mind, and its income is one lease. A 100-unit apartment building is bought by professional operators who value the ability to raise rents, manage expenses at scale and finance with agency debt. Those buyers do not price risk the same way, so the two property types do not share a cap rate even in the same city.

The practical consequence is that a cap rate is only comparable against similar property, in the same market, at the same point in time. Any comparison that crosses one of those lines is measuring the difference between two markets or two buyer pools, not the difference between two deals.

Three ways a cap rate goes wrong

Most bad cap rates are not arithmetic errors. They come from inconsistent inputs:

• Collected rent plus a vacancy allowance. If the rent figure is what the property actually collected last year, applying vacancy again counts the same loss twice. Start from scheduled rent at full occupancy, then subtract vacancy once.
• Omitting management because the owner self-manages. The fee is a proxy for the work. Leaving it out raises NOI and raises the cap rate, which makes the property look better than an identical one that pays a manager.
• Mixing pro forma and in-place numbers. A seller’s pro forma may use market rent, a renovated unit mix, or an expense ratio from a different property. A cap rate built from pro forma rent and in-place expenses is not a cap rate; it is a blend of two scenarios.

A fourth, quieter error is mixing price conventions: some sellers quote a cap rate on the contract price, others on price plus closing costs or on an all-in basis that includes the renovation. The difference is usually small, but it is enough to make two “6% cap rate” listings incomparable.

Cap rate against the other ratios

Using the result

Read the cap rate alongside the operating expense ratio and the gross rent multiplier shown in the breakdown. A high cap rate paired with an unusually low expense ratio usually means an expense is missing. A cap rate that moves a full point when you change vacancy from 5% to 8% is telling you the deal is sensitive to occupancy, which is worth knowing before you make an offer rather than after.