The capitalization rate (cap rate) measures a property's rate of return based on its net operating income and market value. Compare different investment properties by their cap rates to find the best deals in your market.
Cap rate (capitalization rate) is the most-used metric in commercial and rental real estate investing. It strips out financing and answers a single question: if you bought this property with cash, what unlevered annual return would the property's operations produce?
This calculator computes net operating income (NOI) — gross rent minus vacancy, property tax, insurance, maintenance, management, and other operating expenses — and divides by the purchase price to get cap rate. The result is comparable across properties, markets, and financing structures.
Cap rates compress two things: the perceived risk of the cash flows and the expected growth in those cash flows. Class A apartment buildings in Manhattan or San Francisco trade at 4–5% cap rates because investors believe the income is reliable and will grow. Class C buildings in declining markets trade at 9–12% because investors price in vacancy risk, deferred maintenance, and uncertain growth. A higher cap rate is not automatically a better deal — it usually means more risk.
$400,000 purchase, two units at $1,500/mo each. Gross rent: $36,000 Vacancy 8%: EGI $33,120 Property tax $4,800, insurance $1,800, maintenance $3,600, management 8% ($2,880), other $1,200 OpEx: $14,280 NOI: $18,840 Cap rate: 4.71% A sub-5% cap rate signals a stable, low-risk market — but a thin operating margin. Many deals in this range only work with significant rent growth or value-add improvements.
$300,000 purchase, four units at $850/mo each. Gross rent: $40,800 Vacancy 12% (market is loose): EGI $35,904 Property tax $4,500, insurance $2,200, maintenance $5,000, management 10% ($4,080), other $1,500 OpEx: $17,280 NOI: $18,624 Cap rate: 6.21% A cap rate near the higher end of the market — but the higher vacancy and maintenance reflect the underlying risk. The premium isn't free.
Use cap rate to: - Compare investment properties on a like-for-like basis - Reverse-calculate market value from observed cap rates and NOI ("Properties like this trade at 6%, my NOI is $30K, value ≈ $500K") - Quickly screen deals for further analysis
Don't use cap rate alone for investment decisions. It says nothing about financing leverage (your actual cash-on-cash return depends on mortgage terms), capital expenditures (deferred maintenance, roof replacements), tax treatment, or appreciation. For a fuller picture, combine with cash-on-cash return, IRR, and property-specific underwriting.
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% of gross rent
Cap Rate
5.71%
Net Operating Income
$28,560
Expense Ratio
37.4%
Gross Rent Multiplier
10.4