Cap Rate Analyzer
Computes the capitalization rate of a rental property to gauge its unleveraged return on value. Investors use it to compare properties and benchmark against local market cap rates before making a purchase.
About this calculator
The capitalization rate (cap rate) expresses a property's annual NOI as a percentage of its current market value, giving a quick measure of investment yield independent of financing. The formula is: Cap Rate (%) = ((Gross Rental Income × (1 − Vacancy Rate / 100)) − Operating Expenses) / Property Value × 100. A higher cap rate implies higher return but often higher risk or a weaker market; a lower cap rate signals stability and strong demand. Cap rates vary significantly by asset class and geography—Class A multifamily in major cities may trade at 4–5%, while retail in secondary markets may exceed 8%. It is an unleveraged metric, meaning mortgage costs are intentionally excluded so properties can be compared on equal footing.
How to use
A property is listed for $800,000. It generates $80,000 in annual gross rent, has a 6% vacancy rate, and $22,000 in annual operating expenses. Step 1: Effective gross income = $80,000 × (1 − 0.06) = $75,200. Step 2: NOI = $75,200 − $22,000 = $53,200. Step 3: Cap Rate = ($53,200 / $800,000) × 100 = 6.65%. A 6.65% cap rate means the property returns 6.65 cents of NOI for every dollar of value.
Frequently asked questions
What is a good cap rate for a rental property investment?
A 'good' cap rate depends on property type, location, and the investor's risk tolerance. In high-demand urban markets, cap rates of 4–5% are common for stable multifamily assets. In secondary or tertiary markets, 7–10% cap rates are typical but carry more risk. Generally, a cap rate above your cost of capital means the property generates positive leverage. Most experienced investors look for at least a 1–2% spread above prevailing financing rates.
How does vacancy rate change the cap rate calculation?
Vacancy reduces effective gross income before operating expenses are subtracted, directly lowering the NOI and therefore the cap rate. For example, increasing vacancy from 5% to 10% on a $100,000 gross income property cuts $5,000 from income, which on a $1,000,000 property lowers the cap rate by 0.5 percentage points. Using realistic market vacancy—not just current occupancy—gives a more conservative and defensible cap rate for underwriting.
Why does cap rate not include mortgage payments in the calculation?
Cap rate is intentionally a financing-neutral metric, measuring the asset's inherent income yield rather than any particular investor's capital structure. Two investors buying the same property with different loan terms would calculate identical cap rates, making it a universal comparison tool. When debt is layered on, metrics like cash-on-cash return and DSCR capture the leveraged picture. Mixing debt payments into cap rate would make cross-property comparisons meaningless.