Real Estate Cap Rate Calculator
The capitalization rate is the most widely used quick measure of return on an income property. It expresses annual net operating income as a percentage of the property's value or purchase price, so two very different deals can be compared on an apples-to-apples yield basis. Because it ignores financing, the cap rate reflects the property's own earning power rather than the investor's loan terms. This calculator takes your annual net operating income and the property value, and returns the cap rate, the implied value at a target cap rate, and the price each US$1 of income is buying.
Cap rate formula
Cap rate % = (net operating income / property value) * 100
Value at target = net operating income / (target cap rate / 100)
Price per US$1 of NOI = property value / net operating income
Net operating income is income after operating expenses but before debt service and income tax. The price per US$1 of NOI is the inverse of the cap rate and works like an income multiple.
Using the cap rate
- Compare cap rates only between similar property types in the same market.
- A lower cap rate signals a higher price relative to income, often reflecting lower risk or stronger growth expectations.
- Use NOI that excludes mortgage payments; financing belongs in a separate cash-on-cash return.
- Always include a realistic vacancy and reserve allowance in NOI, or the cap rate will overstate returns.
- The value-at-target output helps you back into a price that meets your required yield.
Cap rate: frequently asked questions
What is a capitalization rate?
The capitalization rate (cap rate) is the ratio of a property's annual net operating income (NOI) to its market value or purchase price, expressed as a percentage. It estimates the unleveraged annual return an investor would earn if the property were bought for cash, ignoring financing and taxes.
How do you calculate the cap rate?
Cap rate equals net operating income divided by property value, times 100. For example, a property with US$60,000 of annual NOI and a US$1,000,000 value has a cap rate of 6%. NOI is gross rental income minus operating expenses, but before mortgage payments and income tax.
What is a good cap rate?
There is no single good cap rate; it depends on the market, property type, and risk. Lower cap rates (4 to 5%) typically reflect lower-risk properties in strong markets with high prices, while higher cap rates (8% or more) reflect higher perceived risk or weaker markets. Compare against local comparable sales.
What is included in net operating income?
NOI is total operating revenue (rents and other income) minus operating expenses such as property management, maintenance, insurance, property taxes, and vacancy allowance. It excludes mortgage principal and interest, capital expenditures, depreciation, and income taxes.
How does cap rate relate to property value?
Property value equals NOI divided by the cap rate. So if market cap rates rise while NOI is fixed, values fall, and if cap rates compress, values rise. Investors use this inverse relationship to estimate value from income, or required return from a known price.
Official sources
- U.S. Securities and Exchange Commission, Investor.gov: Investing glossary.
- U.S. Census Bureau: Housing statistics.
Reviewed by the CalculatorHub team, edited by James Graham, 17 June 2026. See our methodology.