Cap Rate Calculator

What cap rate is actually measuring

Capitalization rate, or cap rate, is an unlevered real-estate yield. It compares a property's annual net operating income with the price or value assigned to the property. That makes it useful when investors want to compare the income power of one asset with another before buyer-specific financing enters the picture.

The distinction matters because cap rate is not the same as levered cash flow. Mortgage principal and interest do not belong inside NOI. If one buyer uses more debt than another, the levered cash flow can change dramatically even though the property itself is producing the same operating income. Cap rate is meant to keep the focus on the building rather than on the buyer's financing structure.

A practical cap-rate worksheet therefore needs to show where NOI came from. If the entered NOI is too optimistic because vacancy, management, repairs, taxes, or insurance were understated, the cap rate can look attractive while the property economics are actually weaker than they first appear.

How this cap rate calculator builds the result

In direct NOI mode, the page takes annual NOI and property value and calculates the cap rate immediately. That route is useful when you already have a stabilized NOI figure from an appraisal, offering memorandum, lender worksheet, or your own operating statement. The same worksheet then compares the result with a target market cap rate and shows the value implied by that target.

In rent-and-expense mode, the calculator builds NOI from annual scheduled rent, recurring other income, vacancy and credit loss, and annual operating expenses. Vacancy reduces rent, other income is added back, and operating expenses are subtracted to produce NOI. The result sheet then shows cap rate, monthly NOI, gross yield before vacancy, expense ratio, and implied values at several common market cap rates.

That structure is more useful than a one-line ratio because it exposes whether the result is being driven by rent, by vacancy, by expense load, or simply by a high or low purchase price. It also makes it easier to compare the entered deal with a market-level cap-rate assumption instead of reading the headline percentage in isolation.

Worked example: 54,000 of annual rent on a 500,000 property

Suppose a rental property is priced at 500,000, produces 54,000 of scheduled annual rent, 1,800 of other annual income, assumes 5% vacancy, and carries 18,000 of annual operating expenses. Vacancy reduces scheduled rent by 2,700, leaving 51,300 of effective rental income. Adding the 1,800 of other income produces 53,100 of effective gross income.

Subtracting 18,000 of operating expenses leaves NOI of 35,100. Dividing 35,100 by the 500,000 property value gives a cap rate of about 7.02%. If the local market is trading closer to a 6.5% cap rate, the same NOI would imply a value of roughly 540,000 rather than 500,000. That comparison does not prove the property is mispriced, but it tells you the entered price is lower than the value implied by that target market yield.

The worked example also shows why gross yield and cap rate are not interchangeable. Gross yield uses top-line rent and ignores vacancy and operating expenses. Cap rate uses NOI, which is why it is usually the more decision-useful number when the goal is to compare real estate on an operating basis.

What cap rate does not answer on its own

Cap rate is a fast screening ratio, not a complete investment decision. It does not tell you how much debt service the property can support, whether major capital expenditures are approaching, how lease rollover risk is distributed, or whether future rent growth or rent decline is likely. Two properties can show the same cap rate while carrying very different structural, tenant, or financing risks.

Cap rate is also market-sensitive. A 5% cap rate can be aggressive in one market and conservative in another depending on location, asset quality, tenant quality, lease duration, interest-rate backdrop, and growth expectations. Use this page to frame the operating yield and valuation relationship, then pressure-test the assumptions with full due diligence before relying on the result for a purchase, refinance, or underwriting decision.