Cap Rate Calculator
Updated · By the CalculatorDash editorial team · How we check our maths
Quick answer
Cap rate = net operating income ÷ property value. A $500,000 building renting for $4,000 a month, with 5% vacancy and operating expenses at 35% of income, produces about $29,640 of NOI, a cap rate of about 5.9%.
How this calculator works
The capitalisation rate measures a property's unlevered return: the net operating income it produces in a year as a percentage of its value. Because it ignores financing, it lets you compare properties regardless of how they're bought.
Net operating income is rent and other income, minus vacancy, minus operating expenses such as property tax, insurance, repairs and management. Mortgage payments and depreciation are not operating expenses. Overestimating rent or underestimating expenses is the most common way investors overpay.
The formula
- Effective gross income
- (rent + other income) × 12 × (1 − vacancy)
- Net operating income
- effective gross income × (1 − operating expense ratio)
- Cap rate
- NOI ÷ property value × 100
Worked example
$4,000 a month is $48,000 a year; after 5% vacancy it's $45,600. Operating expenses of 35% leave $29,640 of NOI. Divided by the $500,000 price, the cap rate is 5.93%.
Tips
- 01Use actual expense records from the seller, not pro forma estimates.
- 02Compare cap rates with similar properties in the same area; they vary widely by city and asset type.
- 03A cap rate below your mortgage rate usually means negative leverage: borrowing lowers your return.
Frequently asked questions
What is a good cap rate?
There's no single answer. Lower cap rates (4–5%) are typical in expensive, stable markets; higher ones (7–10%) in riskier or smaller markets. Compare like with like.
Does cap rate include the mortgage?
No. Cap rate ignores financing. Use cash-on-cash return to measure the return on the cash you invest with a loan.
What expenses go into NOI?
Property taxes, insurance, repairs and maintenance, property management, utilities you pay, HOA fees and reserves. Not mortgage payments, depreciation or income tax.
How do I value a property from a cap rate?
Divide NOI by the market cap rate. $30,000 of NOI at a 6% cap rate implies a value of $500,000.