Cap Rate Calculator
Calculate the capitalization rate for any rental property — annual NOI divided by purchase price. The standard valuation metric for income real estate.
What is a cap rate calculator?
The cap rate (capitalization rate) is the standard back-of-envelope valuation metric for income real estate. It is the property's annual net operating income divided by purchase price. A higher cap rate means more income per dollar invested — but usually higher risk.
Formula
Cap rate = NOI / Price × 100
Net Operating Income = effective gross income − operating expenses. NOI excludes mortgage payments, depreciation, and capex.
Worked example
$400,000 property renting for $3,000/month with 5% vacancy and 35% expenses:
- Effective gross: $36,000 × 0.95 = $34,200
- NOI: $34,200 × 0.65 = $22,230
- Cap rate: $22,230 / $400,000 = 5.56%
How to use this calculator
- Enter purchase price and gross monthly rent.
- Vacancy rate: 5% is typical for stable urban areas; 8-10% for transitional markets.
- Operating expenses: 35-50% of gross rent for typical SFRs (small repairs, property tax, insurance, management).
Frequently asked questions
What is a "good" cap rate?
Depends on market. Class A in NYC/SF/LA: 3-5%. Stable suburban: 5-7%. Class B/value-add: 7-9%. Class C and tertiary markets: 9-12%+. Higher cap = higher yield but higher risk.
Should the calculation include the mortgage?
No — cap rate is intentionally lender-agnostic. It measures the property's unlevered yield. To compare against debt costs, look at cash-on-cash return instead.
What about capital expenditures?
Strict NOI excludes capex (roof, HVAC, etc.). Some investors deduct a capex reserve (5-10% of gross) before calculating cap rate to be more conservative.
How does cap rate relate to value?
Inverse: Value = NOI / cap rate. If a $50K NOI property is in a 6% cap market, value is $833K. In a 4% cap market, the same NOI is worth $1.25M.