Cap rate calculator

How cap rate is calculated

Cap rate is net operating income divided by the purchase price:

Cap rate = Net operating income ÷ Purchase price

Net operating income (NOI) is the annual rent, minus an allowance for vacancy, minus every cost of running the property — taxes, insurance, management, repairs, HOA dues, any utilities you pay. It stops short of the mortgage. That exclusion is the whole point: it lets you compare two buildings without your loan terms getting in the way.

A worked example

A $350,000 duplex rents for $2,800 a month, so $33,600 a year. Allow 5% for vacancy and that's $31,920 of effective income. Taxes are $4,200, insurance $1,800, and other operating costs $2,400 — $8,400 in total. NOI is $23,520, and $23,520 ÷ $350,000 gives a cap rate of about 6.7%.

Those are the numbers the calculator above starts with, so you can change one at a time and watch which ones actually move the result.

Where cap rate misleads

• It says nothing about your loan. A strong cap rate can still be a deal that loses money every month once the mortgage is paid. Cash flow and debt service coverage answer that; cap rate does not.
• Understated expenses inflate it. The most common error is leaving out management, capital repairs, or a realistic vacancy allowance. A cap rate built on optimistic costs is just a higher number, not a better property.
• It only compares like for like. Cap rates vary widely by city and property type. Comparing a rate in a stable expensive metro to one in a smaller market tells you about the markets, not about which deal is better.
• It's a snapshot.It uses today's rent and today's costs. Rising taxes or insurance can erode it without the price changing at all.

Common questions

What is a good cap rate?

It depends on the market and the risk. KnowVest treats 4% or higher as the healthy range for a residential rental; below that, the property is priced high relative to the income it produces. Stable, expensive metros commonly trade at lower cap rates than smaller markets, so a "good" number in one city can be poor in another.

Does cap rate include the mortgage?

No. Cap rate measures the property, not the financing, so it deliberately excludes mortgage payments. Two buyers with different loans get the same cap rate on the same building. If you want a number that reflects your loan, look at cash-on-cash return or debt service coverage instead.

How do you calculate cap rate?

Cap rate = net operating income divided by purchase price, expressed as a percentage. Net operating income is your annual rent minus a vacancy allowance and every operating cost — taxes, insurance, management, repairs, HOA — but before any mortgage payment.

What is the difference between cap rate and cash-on-cash return?

Cap rate ignores debt and asks what the property yields outright. Cash-on-cash divides your annual cash flow after the mortgage by the cash you actually put in, so it reflects your loan and your down payment. A leveraged deal can have a modest cap rate and a strong cash-on-cash return, or the reverse.