Cap Rate Calculator

How to Use the Cap Rate Calculator

Using the Cap Rate Calculator is simple. Enter the property value, monthly rent, other rental income, vacancy rate, and operating expenses. Realtolic automatically estimates potential annual income, effective gross income, operating expenses, net operating income (NOI), cap rate, monthly NOI, expense ratio, and estimated property value based on your target cap rate.

Cap Rate Calculator Example

For example, suppose a rental property is worth $400,000 and earns $3,200 per month in rent. With a 5% vacancy rate, the effective gross income is $36,480 per year. If property taxes are $4,800, insurance is $1,800, maintenance is 5% of rent, and property management is 8%, the estimated operating expenses are about $11,438 per year. This leaves approximately $25,042 in net operating income (NOI), giving the property an estimated cap rate of 6.26%.

How Is Cap Rate Calculated?

Cap rate measures a property's estimated annual return based on its net operating income and property value, without including mortgage financing. The basic formula is: Cap Rate = Net Operating Income (NOI) ÷ Property Value × 100. For example, if a property produces $25,000 in annual NOI and is worth $400,000, its cap rate is 6.25%.
For a step-by-step example, read our guide on how to calculate cap rate on a rental property.

What Is a Good Cap Rate for a Rental Property?

There is no single cap rate that is good for every property. Cap rates can vary by location, property type, market conditions, property condition, and investment risk. A higher cap rate may suggest a higher potential return, but it can also come with higher risk. Investors should compare cap rate with cash flow, expenses, financing, and other investment metrics before making a decision.

What Expenses Are Included in Cap Rate?

Cap rate should include the normal operating expenses required to own and operate the property. These may include property taxes, insurance, maintenance and repairs, property management fees, HOA fees, owner-paid utilities, and other recurring operating costs. Mortgage principal and interest payments are normally not included in NOI when calculating cap rate.

Cap Rate vs. Cash-on-Cash Return

Cap rate and cash-on-cash return measure property performance differently. Cap rate compares net operating income with the property's value and does not depend on mortgage financing. Cash-on-cash return compares annual pre-tax cash flow with the actual cash invested, such as the down payment and closing costs. Using both metrics can give investors a clearer picture of a rental property's performance.

Does Financing Affect Cap Rate?

Mortgage financing does not directly affect a property's cap rate because mortgage payments are not included in net operating income (NOI). Cap rate focuses on the property's operating performance regardless of how it is financed. Financing does affect cash flow and cash-on-cash return, so investors should consider those metrics separately.

How Does Vacancy Affect Cap Rate?

Vacancy can reduce a property's effective rental income and net operating income. When vacancy increases, NOI may decrease, which can lower the property's cap rate if its value stays the same. Using a realistic vacancy rate can give you a more useful estimate of the property's operating performance.

Cap Rate Calculator FAQs

What does a 7% cap rate mean?

A 7% cap rate means the property's annual net operating income is equal to about 7% of its property value. For example, a $400,000 property would need approximately $28,000 in annual NOI to have a 7% cap rate. This does not mean the investor is guaranteed a 7% total return.

Is a higher cap rate always better?

No. A higher cap rate can indicate a higher potential income return, but it may also reflect greater risk, an older property, a less desirable location, or other market factors. Cap rate should be considered together with property condition, location, cash flow, expenses, and investment goals.

Do you include mortgage payments when calculating cap rate?

No. Mortgage principal and interest payments are generally excluded from the cap rate calculation. Cap rate uses net operating income before financing costs so properties can be compared regardless of how they are financed.

Can I use cap rate to compare rental properties?

Yes. Cap rate can help compare the operating performance of similar rental properties. For a more useful comparison, look at properties in similar locations and of similar types, and also consider expenses, condition, vacancy, cash flow, financing, and future risks.

Can a cap rate be negative?

Yes. A cap rate can be negative if a property's operating expenses are greater than its effective rental income, causing negative net operating income (NOI).

Should I use purchase price or current market value for cap rate?

You can use the purchase price when analyzing a property you may buy. For a property you already own, current market value can be useful for measuring its present performance. Use the same approach when comparing similar properties.

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