Capitalization Rate Calculator
Computes the capitalization rate of an investment property using net operating income and current value. Investors use it to compare properties and assess whether a deal meets their return threshold.
About this calculator
The capitalization rate (cap rate) is a core real-estate valuation metric that expresses a property's net operating income (NOI) as a percentage of its market value. The formula is: Cap Rate (%) = ((annualIncome − annualExpenses) / propertyValue) × 100. Annual income covers all rental and ancillary revenue; annual expenses cover operating costs such as management, insurance, taxes, and maintenance — but not mortgage payments, which makes cap rate independent of financing. A higher cap rate implies higher return but often higher risk or a less desirable location. Cap rates are widely used to compare assets across markets and to derive property values when NOI is known (Value = NOI / Cap Rate).
How to use
A commercial unit generates $48,000/year in rent and has $12,000 in operating expenses. The property is listed for $400,000. 1. NOI = $48,000 − $12,000 = $36,000 2. Cap Rate = ($36,000 / $400,000) × 100 = 9.0% Enter 48000, 12000, and 400000 into the calculator to get a cap rate of 9.00%. This tells you that unlevered, the property returns 9 cents per dollar of value each year.
Frequently asked questions
What is a good cap rate for a rental property investment?
Cap rates of 5–10% are typical for residential and small commercial properties, but 'good' depends heavily on location, asset class, and current interest rates. In prime urban areas, cap rates of 3–5% are common due to high prices and strong demand. In secondary markets, 7–10% is more achievable. As a rule of thumb, your cap rate should exceed your mortgage interest rate to ensure positive leverage.
Why does the cap rate formula exclude mortgage payments?
Cap rate is designed to measure the intrinsic return of the asset itself, independent of how it is financed. Including debt service would make the metric vary between buyers with different financing structures, making cross-property comparison meaningless. If you want a return metric that accounts for your specific leverage, use cash-on-cash return instead, which divides pre-tax cash flow by the actual equity invested.
How can I use cap rate to estimate a property's value?
Because Cap Rate = NOI / Value, you can rearrange the formula to Value = NOI / Cap Rate. If comparable properties in an area trade at a 6% cap rate and your target property produces $30,000 NOI, its estimated value is $30,000 / 0.06 = $500,000. This approach, called direct capitalization, is commonly used by appraisers and commercial brokers to sanity-check asking prices.