Real Estate & Credit
Cap Rate Calculator
Work out the capitalization rate of an income property.
Cap Rate Calculator
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How it works
The cap rate is the net operating income divided by the property value. It expresses what an all-cash buyer earns before financing: a $30,000 income on a $500,000 property is a 6% cap rate.
Cap rates are the market pricing language for income property. Lower cap rates mean pricier markets where buyers accept thinner income yields; higher cap rates usually mean smaller markets, older buildings or more risk.
Formula
Cap rate = NOI / Property value
NOI = gross rent minus operating expenses, before debt service and income tax.
Worked example
Example: a duplex rents for $3,500 a month, with $1,000 a month in operating costs. NOI = $30,000 a year. At a $500,000 price, cap rate = 30000 / 500000 = 6%.
WORKED EXAMPLE — DEFAULT INPUTS
What to know
Cap rates compress when money is cheap and expand when rates rise, because buyers bid more aggressively with low-cost financing. A 5% cap market and a 9% cap market are both normal; they simply price different risk and growth expectations.
Compare cap rates within the same market and asset class, not across them. A 6% cap on stable multifamily may be a better deal than a 10% cap on an old single-tenant building with vacancy risk, because the risk-adjusted picture is what matters.
For a quick sanity check on a listing, compare the advertised price against the NOI the owner claims. A thin cap rate with rising local rents may still be reasonable; a rich cap rate in a declining area is often a warning, not an opportunity.
FAQ
What is a good cap rate?
It depends on the market and asset class. Stabilized multifamily in major metros might trade at 4-6%; value-add or tertiary markets often demand 7-10% to compensate for risk.
Cap rate vs cash on cash, what is the difference?
Cap rate ignores financing and taxes, so it describes the property itself. Cash on cash measures the return on the cash you actually invest after a mortgage, which is why leverage changes it.
Is NOI before or after debt?
Before debt. NOI is rent minus operating costs. Mortgage payments and income tax come later and are not part of the cap rate.
Does cap rate include appreciation?
No. It is an income yield only. Total return adds appreciation, which is why low-cap markets can still be attractive.