Capitalization Rate Calculator
Calculate the capitalization rate — annual net operating income divided by property value — to gauge an income property's unlevered return. Use it for apples-to-apples comparison of commercial and multifamily properties independent of how they are financed.
Last updated: May 2026
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About this calculator
Cap rate (capitalization rate) is the unlevered annual yield of an income-producing property, expressed as a percentage. The formula is: Cap Rate (%) = Net Operating Income / Property Value × 100. Variables: Net Operating Income (NOI) is the property's annual potential rental income at full occupancy, less vacancy and credit loss and less all operating expenses — property tax, insurance, repairs and maintenance, property management, owner-paid utilities, and HOA/CAM charges — but explicitly EXCLUDING mortgage payments, depreciation, capital expenditure, and income tax; Property Value is the market value or purchase price. Cap rate deliberately ignores financing so it isolates the operating economics of the asset itself, making it the standard valuation shorthand in commercial real estate. Edge cases: a negative NOI gives a negative cap rate (the property loses money before financing); very low cap rates (sub-3%) typically indicate the buyer is paying for expected appreciation, growth, or trophy status, not for current cash flow. Cap rate moves inversely with price for a fixed NOI, so when interest rates rise, cap rates tend to rise too (asset values fall) — this is the single biggest driver of commercial property valuations over the last 30 years.
How to use
Example 1 — Stabilized small apartment. Net operating income $64,000/year (for instance $96,000 gross income minus $32,000 operating expenses), property value $850,000. Cap rate = 64,000 / 850,000 × 100 ≈ 7.53%. A 7.5% cap is healthy for stabilized small multifamily in most secondary US markets in 2025–26; large coastal markets typically trade closer to 4.5–5.5%. Example 2 — Light-industrial property in a Sun Belt market. Net operating income $182,000/year (for instance $240,000 gross minus $58,000 expenses), property value $2,400,000. Cap rate = 182,000 / 2,400,000 × 100 ≈ 7.58%. Industrial cap rates compressed sharply during the 2020–22 e-commerce boom; a 7.5% cap in a smaller industrial market today reflects the cooling that followed the 2023–24 rate cycle.
Frequently asked questions
What is a good cap rate and how do I benchmark it?
A "good" cap rate depends entirely on asset class, market, and risk profile — there is no single universal number. As of 2025–26, typical cap rates in the US are: trophy office in coastal cities 4–5%, suburban office 7–9%, multifamily in primary markets 4.5–5.5%, multifamily in secondary markets 6–7.5%, industrial 5–7%, neighbourhood retail 6.5–8%, hospitality 7–10%, and self-storage 5.5–7%. The risk-free benchmark is the 10-year Treasury yield; the spread between cap rate and Treasury (the "risk premium") historically averages 300–400 basis points. When that spread compresses, cap rates are aggressive relative to fundamentals; when it widens, real estate is being priced cheaply. Always compare against recent comparable transactions in the same submarket and asset class — appraisers and brokers publish these regularly.
What is the difference between cap rate and yield?
Cap rate and yield are closely related but use different denominators and conventions. Cap rate uses NOI and property value, ignoring financing entirely. Net yield (the related rental-yield calculator) is the same concept but typically applied to residential and uses all-in cost basis (price plus closing costs and acquisition spend) rather than current market value. Gross yield ignores expenses entirely and uses headline rent — fastest to calculate, least informative. Cash-on-cash return divides annual cash flow after debt service by the actual cash invested, capturing leverage effects that cap rate ignores. Internal rate of return (IRR) compounds all of these effects over a multi-year holding period and is the most complete measure. Cap rate sits in the middle — easier to compute than IRR, more meaningful than gross yield, and the industry standard for valuing income property.
What are the most common mistakes when calculating or interpreting cap rate?
The most common is using pro-forma (projected) NOI instead of trailing actual NOI. Sellers always present an optimistic pro-forma; trailing-twelve-month (T12) actuals are what you should price on. The second mistake is excluding real operating expenses to inflate NOI — under-reserving for capital expenditure, omitting management fees because the owner self-manages, or low-balling maintenance. A defensible NOI uses a full 8–12% management fee and a 5–10% capex reserve even if not currently incurred. The third is comparing cap rates across asset classes without adjusting for risk: a 7% cap on hospitality is a totally different risk-return than 7% on stabilised multifamily. The fourth is forgetting that cap rate moves inversely with price: when you negotiate the price down, the cap rate goes up, which is the same as saying the deal got better. The fifth is treating cap rate as a measure of "good" or "bad" — it is just a price-to-income ratio, and the right level depends on growth expectations, risk, and the local interest-rate environment.
When should I NOT use cap rate?
Skip cap rate for single-family residential rentals where the industry uses gross or net rental yield instead — using cap rate makes your numbers incomparable to MLS comps. Avoid it for value-add or repositioning deals where the in-place NOI is artificially low and the bet is on improving it; use stabilized pro-forma cap rate (with a clear path to stabilization) plus IRR on the project. Do not use cap rate as the sole metric for leveraged deals where mortgage-induced cash flow dominates returns — cap rate ignores financing entirely. Skip it for short-term holds (flips, 1031-exchange bridges) where exit price drives returns more than ongoing income. And do not compare cap rates across markets without accounting for property tax differences — a 7% cap in California (with low property tax) is genuinely better than 7% in Texas (with high property tax) because the underlying NOI is more durable.
How does cap rate relate to property value when interest rates change?
Cap rate and price are inversely linked for a given NOI: Value = NOI / Cap Rate. When market cap rates rise, prices fall. The biggest driver of cap rate movements is the prevailing interest-rate environment — when the 10-year Treasury yield rises, investors demand a higher cap rate as compensation for buying a long-duration cash-flow asset over a risk-free bond. The 2022–23 Fed hike cycle pushed Treasury yields from 1.5% to over 5%, and commercial real estate cap rates widened roughly 100–200 basis points across most sectors, which translated to 15–25% declines in property values for stabilized properties. Conversely, the 2010–21 low-rate era compressed cap rates to historical lows and inflated values. When modeling a future hold, always sensitize the exit cap rate up 50–100 basis points from today's level — that is what conservative underwriters do.