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Cap Rate Calculator

Calculate the capitalization rate for a rental property. Enter property value, gross income, and operating expenses to find cap rate and NOI.

$
$
$
Cap Rate
7.03%
Net Operating Income
$20,040.00/yr
$1,670.00/mo
Property Value
$285,000.00
Gross Income
$28,200.00/yr
Operating Expenses
$8,160.00/yr
28.94% of gross
Formula: Cap Rate = NOI / Value = $20,040.00 / $285,000.00 = 7.03%
Cap Rate Ranges by Property Type
Property TypeTypical Cap RateRisk Level
Class A Multifamily4-5%Low
Class B Multifamily5-7%Low-Medium
Single Family Rental5-8%Medium
Office (Urban)5-7%Medium
Retail6-9%Medium-High
Industrial/Warehouse5-7%Low-Medium
Self-Storage5-8%Medium

Cap Rate Formula

The capitalization rate measures an investment property's potential return:

Cap Rate = NOI / Property Value × 100

Where NOI (Net Operating Income) = Gross Rental Income - Operating Expenses.

What Counts as Operating Expenses

IncludedNot Included
Property taxesMortgage payments
InsuranceDepreciation
Property managementIncome taxes
Maintenance & repairsCapital expenditures
Vacancy allowanceLoan origination fees
Utilities (if landlord-paid)Personal expenses

Cap Rate vs. Other Metrics

MetricFormulaIncludes Financing
Cap RateNOI / Property ValueNo
Cash-on-Cash ReturnCash Flow / Cash InvestedYes
GRM (Gross Rent Multiplier)Price / Gross Annual RentNo
ROITotal Return / Total InvestmentYes

Factors That Affect Cap Rate

  • Location: Properties in high-demand urban areas have lower cap rates (higher prices relative to rent)
  • Property condition: Newer or renovated properties command lower cap rates
  • Tenant quality: Long-term, creditworthy tenants reduce risk and cap rate
  • Market conditions: Rising interest rates generally push cap rates higher
  • Property type: Multifamily tends to have lower cap rates than retail or industrial

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Frequently Asked Questions

What is a cap rate?

Capitalization rate (cap rate) is the ratio of a property's net operating income (NOI) to its market value. It measures the expected rate of return on a real estate investment, expressed as a percentage.

How is cap rate calculated?

Cap Rate = Net Operating Income / Property Value × 100. NOI is calculated as gross rental income minus operating expenses (property taxes, insurance, maintenance, management fees, vacancy). It does not include mortgage payments.

What is a good cap rate?

It depends on the market and property type. Generally, 4-6% is considered low risk (Class A properties in strong markets), 6-8% is moderate, and 8-12% is higher risk but potentially higher return. There is no universally "good" cap rate.

Does cap rate include mortgage payments?

No. Cap rate uses NOI, which excludes debt service (mortgage payments). This makes cap rate useful for comparing properties regardless of financing. To evaluate returns with financing, use cash-on-cash return instead.

What operating expenses are included?

Typical operating expenses include property taxes, insurance, property management fees (8-12% of gross rent), maintenance and repairs, vacancy allowance (5-10%), utilities (if landlord-paid), HOA fees, and landscaping.

Can cap rate be negative?

Yes. A negative cap rate means operating expenses exceed gross income — the property loses money before any mortgage payment. This may occur with high vacancy, deferred maintenance, or properties in transition.