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Cap Rate Calculator

Find a property cap rate.

How it is calculated

The capitalization rate is cap rate = NOI ÷ price × 100. NOI (net operating income) is a year of rent and other property income minus operating expenses such as taxes, insurance, maintenance and management. It excludes mortgage payments, income tax and depreciation. The price is the purchase price or current market value, and must be above zero. Both numbers should cover the same property and be in the same currency, with NOI on an annual basis. The result is shown as a percentage with two decimals. It describes the return as if the property were bought with cash, so it ignores financing and future rent growth. A negative NOI gives a negative rate.

Worked example

A rental building bought for 450,000 earns a net operating income of 36,000 a year. Rate: 36,000 ÷ 450,000 = 0.08. As a percentage, that is 8.00%. If the same income were available on a 600,000 property, the cap rate would fall to 6.00%.

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Common mistakes

  • Using gross rent instead of NOI. Operating costs have to be subtracted first, otherwise the rate looks too high.
  • Including mortgage payments in the expenses. Cap rate ignores financing; loan payments are not operating expenses here.
  • Entering monthly NOI against a full price. The income must be annual, or the rate comes out about twelve times too small.
  • Comparing cap rates across very different locations or property types and assuming a higher rate is always better. A higher rate often reflects higher risk.
  • Using the original purchase price when the question is about today's value. The rate changes depending on which price you divide by.

Sources

About this calculator

This calculator finds a property's capitalization rate — net operating income (NOI) divided by current market value or purchase price, expressed as a percentage — the standard shorthand real estate investors use to compare the return of one income property against another regardless of size or price.

Real estate investors and brokers use cap rate to quickly screen deals, appraisers use it to estimate a property's value from its income, and landlords use it to track how a rental's return changes over time. A higher cap rate generally signals higher potential return, but often comes with higher risk.

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  • Editorial team

    The same formula works backwards as a quick valuation check. If comparable buildings in an area trade at about a 6% cap rate and a property earns 36,000 of NOI a year, that implies a value near 600,000. The weak spot is the NOI itself: a seller's figure may leave out vacancy, management or repairs, so rebuild it from actual statements where you can. What expense lines do you find sellers most often leave out?

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