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Reverse Cap Rate Calculator

Enter a target value and cap rate to find the NOI the property must produce.

How it is calculated

The capitalisation rate is net operating income divided by property value, so a target value and a market cap rate fix the income the property must earn. NOI = target value × cap rate ÷ 100, with the cap rate entered as a percentage (6.5 means 6.5%). The tool also divides that by twelve, monthly NOI = NOI ÷ 12, to give a monthly figure. Both the value and the cap rate must be above zero, or there is no result. NOI means income after operating expenses such as taxes, insurance, maintenance and management, and before mortgage payments, depreciation and income tax. Amounts are shown in dollars. The tool uses the one cap rate you type and does not choose or verify a market rate for any location or property type.

Worked example

An investor wants to pay $2,400,000 for a building and expects a 6.5% cap rate. Required NOI: 2,400,000 × 6.5 ÷ 100 = $156,000.00 per year. Monthly: 156,000 ÷ 12 = $13,000.00. If the building actually earns less than that, then at a 6.5% cap rate it is worth less than $2.4 million: for example an NOI of $130,000 supports a value of about $2,000,000 at the same rate.

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Common mistakes

  • Typing the cap rate as a decimal (0.065) instead of a percentage (6.5). The tool then returns an NOI a hundred times too small.
  • Using gross rent instead of NOI when comparing with the result. Operating expenses must be deducted first.
  • Counting mortgage payments as an expense. NOI is calculated before debt service, so it should not include loan payments.
  • Using one cap rate for different property types or locations. Rates vary widely between, for example, offices and apartments, and the tool does not supply one.
  • Reading the monthly figure as monthly rent. It is monthly NOI, so rent will be higher once operating costs are added back.

Sources

About this calculator

The standard capitalization rate formula divides a property's net operating income by its value to express return as a percentage (Cap Rate = NOI ÷ Value). Running that formula in reverse answers a different question: given a target property value and a market cap rate, how much net operating income does the property need to generate to justify that value? The math is simply NOI = Target Value × Cap Rate.

This calculator takes a target value and a cap rate and returns the required NOI. Commercial real estate investors underwriting an acquisition, appraisers checking whether a listed asking price is supported by current income, and developers pro forma-ing a project's required rents use it to work backward from a purchase price or valuation target to the operating performance the property must hit — a quick sanity check before diving into a full income and expense pro forma.

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Comments (1)

  • Editorial team

    The answer is net operating income, which is rent and other income after operating costs but before loan payments and taxes. For a 1,000,000 target at a 6.5% cap rate the tool returns 65,000.00 a year, or 5,416.67 a month. Moving to 7% asks for 70,000.00, so half a point matters. Add expected operating expenses on top to see the rent you must collect. What cap rate do recent sales near you show?

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