Cap Rate Calculator
The capitalization rate (cap rate) is one of the most widely used metrics in real estate investment analysis. It measures the ratio of a property's net operating income to its market value, expressed as a percentage. Cap rate lets you compare investment properties on an apples-to-apples basis regardless of how they are financed. A property worth $500,000 generating $30,000 in NOI has a 6% cap rate. Enter your NOI and property value below to calculate the cap rate instantly.
Cap rate formula
Cap Rate (%) = Net Operating Income / Property Value x 100
Where Net Operating Income = Gross Rental Income - Vacancy Losses - Operating Expenses. Operating expenses include property taxes, insurance, maintenance, utilities, and property management fees. They do NOT include mortgage principal or interest payments.
How to use the cap rate
- Compare investment properties: A higher cap rate means a higher unlevered return relative to price.
- Estimate property value using the income approach: Value = NOI / Market Cap Rate.
- Gauge market risk: Lower cap rates typically indicate lower-risk markets (strong demand, stable income), while higher cap rates often reflect higher risk or less desirable locations.
- Track market trends: Rising cap rates indicate falling values or rising income; falling cap rates indicate rising values or compressing yields.
- Use as a starting point, not the sole decision criterion. Always combine with cash-on-cash return, GRM, and local comparables.
Cap rate calculator: frequently asked questions
What is a cap rate?
A capitalization rate (cap rate) is the ratio of a property's net operating income (NOI) to its current market value or purchase price. It expresses the expected annual return on a property as a percentage, before financing costs. A 6% cap rate means the property generates 6 cents of NOI for every dollar of value.
What is the cap rate formula?
Cap Rate = Net Operating Income / Property Value. NOI is gross rental income minus vacancy losses and operating expenses (excluding mortgage payments). Property value is the current market value or purchase price.
What is a good cap rate for a rental property?
Cap rates vary significantly by market and property type. Urban multifamily properties in major cities often trade at 4 to 6% cap rates, while suburban or rural properties may trade at 7 to 10% or higher. A higher cap rate generally means higher return but also higher risk. Investors compare cap rates to local market benchmarks rather than applying a single universal standard.
Does cap rate include mortgage payments?
No. Cap rate is calculated before financing. It uses net operating income, which excludes debt service (mortgage principal and interest). This makes cap rate useful for comparing properties regardless of how they are financed. Use cash-on-cash return to account for financing.
How is cap rate used to estimate property value?
You can rearrange the formula: Property Value = NOI / Cap Rate. If a property generates $50,000 NOI and the market cap rate is 5%, the estimated value is $1,000,000. This income approach to valuation is widely used in commercial real estate appraisal.
Official sources
- National Association of Realtors (NAR): Commercial Real Estate Research.
- CCIM Institute: Financial Analysis for Commercial Investment Real Estate (CI 101).
- Federal Reserve Bank of St. Louis (FRED): Economic Data.
Reviewed by the CalculatorHub team, edited by James Graham, 14 June 2026. See our methodology.