Cap Rate Calculator
Net operating income against property price.
Reviewed by the Calculation Machine team · Updated 24 October 2026 · How we check our maths
Your values
ⓘ Live results
- Cap rate
- 5.56%
- Net operating income
- $23,646.08
- Effective gross income
- $37,224.00
- Operating expenses
- $13,577.92
- Expense ratio
- 36.5%
- Value at your target cap rate
- $363,785.85
- Monthly NOI
- $1,970.51
Quick answer
The capitalization rate is a property's annual net operating income (NOI) divided by its purchase price or market value. NOI is rent after vacancy minus operating expenses such as tax, insurance, maintenance and management, but not mortgage payments. A $425,000 rental producing $23,646 of NOI has a cap rate of 5.56%.
What the Cap Rate calculator does
This calculator builds net operating income from the figures you actually have — monthly rent, a vacancy allowance, property tax, insurance, maintenance and a management fee — then divides it by the price. It also shows the expense ratio and what the property would be worth at the cap rate you want, which is the most useful number when deciding how much to offer.
Cap rate ignores financing on purpose. Two buyers paying the same price for the same building get the same cap rate whether one pays cash and the other borrows 80%, which makes it the standard way to compare properties and markets. To see the return on the cash you put in after the mortgage, use the cash-on-cash return calculator; to check whether the income covers a loan, use the DSCR calculator.
The result is only as good as the expense figures. Use the actual tax bill and an insurance quote, not the seller's pro forma.
The formula
Cap rate = NOI ÷ price × 100 NOI = rent × 12 × (1 − vacancy) − (tax + insurance + maintenance + management) Value at target = NOI ÷ target cap rate
| Symbol | Meaning | Unit |
|---|---|---|
| rent | Gross scheduled monthly rent for all units | $/month |
| vacancy | Share of the year's rent you expect to lose to empty units and non-payment | % |
| tax, insurance, maintenance | Annual operating costs, including a reserve for capital items such as roofs and appliances | $/year |
| management | Property manager's fee, charged here as a percentage of collected rent | % of rent |
| price | Purchase price or current market value | $ |
This is the direct capitalization method described in appraisal texts such as the Appraisal Institute's *The Appraisal of Real Estate*. It assumes a stable, stabilized income; it does not apply well to vacant buildings, properties needing major work or income expected to change sharply, where a discounted cash flow or IRR analysis fits better.
The retired rental cap rate calculator now points here: the inputs above are the ones it used, and the same formula covers single-family rentals, small multifamily and commercial property.
Worked examples
Single-family rental at an asking price
A $425,000 house rents for $3,300 a month, with a 6% vacancy allowance, $5,200 tax, $1,600 insurance, $3,800 maintenance and an 8% management fee. The buyer wants 6.5%.
Inputs
- Purchase price425000 $
- Gross monthly rent3300 $
- Vacancy allowance6 %
- Annual property tax5200 $
- Annual insurance1600 $
- Annual maintenance and capex3800 $
- Management fee8 % of rent
- Target cap rate6.5 %
Result
- Cap rate5.56%
- Net operating income$23,646.08
- Effective gross income$37,224.00
- Operating expenses$13,577.92
- Expense ratio36.5%
- Value at your target cap rate$363,785.85
NOI of about $23,646 gives a 5.56% cap rate. To hit 6.5% on the same income the price would need to be about $363,800, so the asking price is roughly $61,000 too high for this buyer's target.
Small apartment building
An eight-unit building listed at $1.2 million collects $11,500 a month, with 5% vacancy, $16,000 tax, $6,500 insurance, $14,000 maintenance and 8% management.
Inputs
- Purchase price1200000 $
- Gross monthly rent11500 $
- Vacancy allowance5 %
- Annual property tax16000 $
- Annual insurance6500 $
- Annual maintenance and capex14000 $
- Management fee8 % of rent
- Target cap rate7 %
Result
- Cap rate7.01%
- Net operating income$84,112.00
- Effective gross income$131,100.00
- Operating expenses$46,988.00
- Expense ratio35.8%
- Value at your target cap rate$1,201,600.00
A 7.01% cap rate on $84,112 of NOI means the price is in line with a 7% target. The 35.8% expense ratio is realistic for an older building, so the income is not being flattered.
Self-managed duplex
A $280,000 duplex brings in $2,600 a month. The owner manages it, so there is no management fee.
Inputs
- Purchase price280000 $
- Gross monthly rent2600 $
- Vacancy allowance5 %
- Annual property tax3600 $
- Annual insurance1500 $
- Annual maintenance and capex3000 $
- Management fee0 % of rent
- Target cap rate8 %
Result
- Cap rate7.69%
- Net operating income$21,540.00
- Effective gross income$29,640.00
- Operating expenses$8,100.00
- Expense ratio27.3%
- Value at your target cap rate$269,250.00
The 7.69% cap rate is flattered by leaving out management. Your own time has a cost, and a buyer or lender will usually add a management fee back in, which would pull the rate down.
What goes into NOI (and what does not)
Getting NOI right is most of the work. Lenders and appraisers follow the same broad rules.
| Item | In NOI? | Note |
|---|---|---|
| Rent, parking, laundry, pet fees | Yes (income) | Use collected income after vacancy |
| Property tax and insurance | Yes (expense) | Use the post-sale tax figure if it will be reassessed |
| Repairs and maintenance | Yes (expense) | Include a reserve for replacements |
| Management, utilities paid by owner, HOA | Yes (expense) | Include a fee even if you self-manage |
| Mortgage principal and interest | No | Financing is excluded by design |
| Depreciation and income tax | No | These depend on the owner, not the property |
| One-off renovation spend | No | Treat as part of the purchase cost |
Reading the cap rate you get
A cap rate is the yield you would earn if you paid cash, so it moves opposite to price: the more buyers will pay for each dollar of income, the lower the rate.
- Lower cap rates usually mean lower perceived risk and stronger expected rent growth, typical of in-demand city neighborhoods and newer buildings.
- Higher cap rates compensate for more risk: weaker local economies, older buildings, tenant turnover or deferred maintenance.
- Interest rates matter: when borrowing costs rise, buyers need more income per dollar of price, and cap rates tend to drift up.
There is no single good cap rate. Compare your figure with recent sales of similar properties in the same area, which a local broker or appraiser can provide.
Cap rate vs rental yield vs cash-on-cash
Gross rental yield divides annual rent by price before any expenses — quick, but it flatters properties with high costs. The rental yield calculator gives both gross and net figures. Cap rate is a net yield after operating expenses but before financing. Cash-on-cash return goes one step further and measures cash flow after the mortgage against the cash you invested, so it changes with your down payment and interest rate while the cap rate does not.
How to use the Cap Rate Calculator
- 1Enter the purchase price or the value you want to test.
- 2Enter total monthly rent for all units and a vacancy allowance (5–8% is a common starting point; use local data if you have it).
- 3Add annual property tax, insurance and maintenance from bills or quotes, then the management fee as a percentage of rent.
- 4Set your target cap rate to see the price that would meet it, and compare with the asking price.
Frequently asked questions
Is a higher cap rate better?
A higher cap rate means more income per dollar of price, but it usually comes with more risk or less expected growth. It is better only if the income is reliable.
Does cap rate include the mortgage?
No. Cap rate uses NOI before any loan payments, so it is the same for a cash buyer and a buyer with a mortgage.
How do I find a property's value from a cap rate?
Divide NOI by the cap rate. A property with $30,000 of NOI is worth $500,000 at a 6% cap rate and $375,000 at 8%.
Should I use the purchase price or current value?
Use the purchase price when evaluating a deal you are about to buy. Use current market value when judging a property you already own, since that is the capital you could release by selling.
What vacancy rate should I use?
Use the local vacancy rate for similar units, adjusted for your property's turnover history. A single-family home is either full or empty, so even one month empty a year is about 8% of rent.
References
- The Appraisal of Real Estate — Appraisal Institute
- Commercial Real Estate Analysis and Investments — Geltner, Miller, Clayton & Eichholtz
About this calculator
- Built and reviewed by the Calculation Machine team · How we build and test calculators
- Last reviewed: October 24, 2026
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