Cap Rate Calculator
Instantly calculate the capitalization rate of any rental or commercial property. Use it when comparing investment properties or estimating returns before making a purchase offer.
About this calculator
The capitalization rate (cap rate) measures a property's income-generating potential relative to its market value, independent of financing. The formula is: Cap Rate = (NOI / Property Value) × 100. Net Operating Income (NOI) is gross rental income minus all operating expenses such as maintenance, insurance, taxes, and property management — but before mortgage payments. A higher cap rate implies greater return but often greater risk, while a lower cap rate signals a more stable, lower-yield asset. Cap rates vary significantly by market and property type; a 4–5% cap rate is typical in high-demand urban markets, while 8–10% may be seen in smaller markets. Investors use cap rate to quickly benchmark one property against another or against alternative investments.
How to use
Suppose you're evaluating a small apartment building priced at $500,000 that generates $40,000 in annual NOI after expenses. Plug in: NOI = $40,000 and Property Value = $500,000. Cap Rate = ($40,000 / $500,000) × 100 = 8.0%. This means the property yields 8% annually on its value before financing costs. If a comparable property in the same area shows a 6% cap rate, this property offers better income relative to price — a useful signal when narrowing your shortlist.
Frequently asked questions
What is a good cap rate for a rental property investment?
A 'good' cap rate depends heavily on the local market, property type, and your risk tolerance. In major metropolitan areas, cap rates of 4–6% are common and reflect high property values and stable demand. In secondary or tertiary markets, 7–10% is more typical. Most investors seek a cap rate that exceeds their cost of capital and compensates for management effort and vacancy risk.
How is cap rate different from cash-on-cash return?
Cap rate ignores financing entirely — it's calculated using NOI and total property value, making it useful for comparing properties on a level playing field. Cash-on-cash return, by contrast, measures the return on only the cash you actually invested (your down payment plus closing costs). If you use a mortgage, these two metrics can differ significantly. Cap rate is better for property comparison; cash-on-cash is better for evaluating your personal return given your specific financing.
Why do lenders and appraisers use cap rate to value commercial properties?
Commercial properties are primarily income-producing assets, so their value is closely tied to the income they generate. Lenders and appraisers use the income approach: Value = NOI / Cap Rate. By applying a market-derived cap rate to a property's NOI, they can estimate what a willing buyer would pay in the current market. This method is more reliable than comparable-sales approaches for unique commercial assets where direct comps are scarce.