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Cap Rate Calculator

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.

Inputs

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%
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% of gross rent

$

Results

Cap Rate

5.71%

Net Operating Income

$28,560

Expense Ratio

37.4%

Gross Rent Multiplier

10.4

Income Breakdown

Expense Breakdown

Last updated: Reviewed by the CalcMountain editorial team

Formula

Net Operating Income (NOI) — annual: NOI = Effective gross income − Operating expenses Where: Effective gross income = Gross rent × (1 − Vacancy %) Operating expenses = Property tax + Insurance + Maintenance + Management + Other Property management = Gross rent × Management % Cap rate: Cap rate = NOI / Property value × 100 Example: $500K property, $48K gross rent, 5% vacancy EGI: $48,000 × 0.95 = $45,600 OpEx: $6,000 (tax) + $2,400 (insurance) + $3,600 (maintenance) + $48,000 × 0.08 (management) + $1,200 (other) = $17,040 NOI: $45,600 − $17,040 = $28,560 Cap rate: $28,560 / $500,000 × 100 = 5.71% Note: cap rate excludes mortgage payments, depreciation, capex, and taxes — those go into a separate cash-on-cash or IRR analysis.

How to use this calculator

  1. Enter the property value (purchase price for a deal under consideration; market value for a property you already own).
  2. Enter annual gross rent — what every unit would pay if 100% occupied at current market rates.
  3. Enter expected vacancy rate. National average for stabilized rentals is 5–8%; submarket-dependent.
  4. Enter operating expenses: property tax, insurance, routine maintenance, property management fee, and any "other" line items (HOA, lawn, snow removal, common-area utilities).
  5. Read the cap rate. Compare to other properties in the same submarket — the right comparison is "what cap rates are similar properties trading at right now?"

Worked examples

Class B duplex

$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.

Higher-risk small multifamily

$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.

When to use this calculator

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.

Common mistakes to avoid

  • Counting mortgage payments as an operating expense. They're a financing cost, not an operating one. Cap rate is unlevered.
  • Ignoring vacancy. Even great properties have turnover; assuming 0% vacancy inflates NOI and cap rate by 5–10%.
  • Underestimating maintenance. The "1% of value per year" rule is a starting point; older properties need more.
  • Self-managing and ignoring management fees. If you ever want to outsource (or sell), buyers will price in 8–10% management cost.
  • Comparing cap rates across markets without context. A 9% cap in a Class C neighborhood is not "better" than a 5% cap in a Class A submarket — they're priced for different risks.
  • Using gross rent instead of effective gross income. Vacancy and credit losses are real.

Frequently Asked Questions

Sources & further reading

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