Cap Rate Calculator
This cap rate calculator shows a property's capitalization rate by dividing its net operating income by its value. The calculator above turns rent, vacancy, and operating costs into a single percentage you can compare across deals. Cap rate ignores your mortgage entirely, so it measures the property itself, not your financing. Enter your numbers above to see a property's cap rate in seconds.
How it's calculated
The cap rate calculator above uses one core formula: cap rate = net operating income (NOI) / property value. NOI is your effective gross income minus operating expenses like property tax, insurance, maintenance, and management. NOI deliberately excludes mortgage payments, because loan terms are about you, not the property.
First, the calculator finds gross rent, then subtracts vacancy to get effective gross income. Next, it subtracts operating expenses to reach NOI. Finally, it divides NOI by the property value to produce the cap rate. A higher cap rate means more income per dollar of value, but it often signals more risk too.
A worked example
Consider a $400,000 rental that brings in $3,400 per month, or $40,800 in gross annual rent. After a 5% vacancy allowance, effective gross income is $38,760. Operating expenses (property tax, insurance, maintenance, and management) total $13,328 per year. That leaves a net operating income of $25,432. Divide NOI by the $400,000 value, and the cap rate is 6.36%. Notice this figure never touched the mortgage, so it compares the property to any other deal regardless of financing.
Common mistakes to avoid
- Including mortgage principal and interest in expenses. Cap rate uses NOI, which excludes all debt service.
- Forgetting vacancy. Always reduce gross rent by a realistic vacancy rate before calculating NOI.
- Leaving out maintenance and management. These are real operating costs, even if you self-manage today.
- Judging a cap rate in isolation. A 'good' cap rate depends on the local market and the property's risk.
- Confusing cap rate with cash-on-cash return. Cap rate ignores your loan; cash-on-cash measures return on cash invested.
Frequently asked questions
What is a cap rate calculator?
A cap rate calculator finds a property's capitalization rate by dividing its net operating income by its value. It shows how much income a property generates per dollar of price. This lets you compare rental deals on equal footing, no matter how each is financed.
How do you calculate cap rate?
Cap rate = net operating income (NOI) / property value. NOI is your rental income after vacancy and operating expenses, but before any mortgage payments. For example, $25,432 in NOI on a $400,000 property gives a 6.36% cap rate.
Does cap rate include the mortgage?
No. Cap rate excludes mortgage payments entirely. It uses net operating income, which leaves out all debt service. This is why cap rate measures the property itself, not your loan, making it ideal for comparing deals.
What is a good cap rate?
A good cap rate depends on the market and the property's risk. Lower cap rates often appear in stable, high-demand areas, while higher cap rates can signal more risk or upside. Compare a property's cap rate to similar local properties, not a fixed target.
What is the difference between cap rate and cash-on-cash return?
Cap rate and cash-on-cash return answer different questions. Cap rate ignores financing and measures the property's income versus its value. Cash-on-cash return measures your annual cash flow against the cash you invested. Use the cash-on-cash return calculator for the financing side.