Cap Rate Calculator
Work out the cap rate on a rental property, and see the net operating income behind it. Enter the price, the rent, a vacancy allowance and your running costs. If you have a cap rate in mind, it will also tell you the most you could pay to hit it.
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Cap rate
Cap rate
Net operating income
How the numbers were worked out
What a cap rate actually is
A cap rate is one number that answers one question: if you bought this property outright with no mortgage, what would it return in its first year?
Cap rate = net operating income / priceThat is the whole thing. A property earning $15,110 a year after running costs, bought for $285,000, has a cap rate of 5.3%.
It is deliberately narrow. It says nothing about your mortgage, nothing about the property going up in value, nothing about tax. It is a first-look number for comparing one property against another on the same footing, which is exactly what it is good at and exactly why you should not stop there.
The word “capitalization” makes it sound like something an appraiser does. It is a division.
Working out your net operating income
Net operating income, or NOI, is what the property earns after the costs of running it. It is the harder half of the calculation, and it is where most of the errors live, so this calculator works it out from figures you already have rather than asking you for it.
Four steps:
| Gross annual rent | what all units bring in at full occupancy |
|---|---|
| minus vacancy loss | the share you do not expect to collect |
| plus other income | parking, laundry, storage |
| minus operating costs | everything you pay to run it |
| = net operating income | what the property earns after running costs |
On a house renting at $2,150 a month with a 5% vacancy allowance and $9,400 a year of running costs:
| Gross annual rent | $25,800 |
|---|---|
| Less vacancy at 5% | $1,290 |
| Effective gross income | $24,510 |
| Less operating expenses | $9,400 |
| Net operating income | $15,110 |
Plenty of calculators will derive NOI for you like this, and several do it well. What is harder to find is one that explains what belongs in each line for someone buying their first or second place rather than a portfolio. That is the rest of this page.
What counts as an operating expense
An operating expense is a cost of running the property. The test is simple: would you still pay this if you owned the place outright with no loan?
Yes, it belongs in:
- Property taxes
- Insurance
- Repairs and maintenance
- Property management fees
- Utilities you pay rather than the tenant
- HOA dues
- Landscaping, pest control, snow removal
- Turnover costs: cleaning, painting, advertising, tenant screening
- Accounting and legal fees for the property
No, it stays out:
- Mortgage principal and interest
- Depreciation
- Capital improvements, meaning a new roof, a new furnace or a kitchen
- Your own income tax
Two that catch people out. Repairs and capital improvements are not the same thing. Fixing a leak is a repair and belongs in. Replacing the roof is a capital improvement and does not, because it is buying a new asset rather than running the existing one. The line is genuinely blurry and reasonable people place it differently.
And set aside money for repairs even in a year you do not spend it. A property that needed nothing this year is not a property with no maintenance costs. It is a property whose maintenance costs have not arrived yet. Many landlords budget a percentage of rent rather than guessing, and putting that figure in gives you a cap rate you can actually plan against.
Why your mortgage is not in here
This is one of the easiest mistakes to make, and it is worth being clear about why the rule exists rather than just stating it.
Cap rate deliberately ignores financing. Two buyers can look at the same building, one paying cash and one borrowing 80%, and they will have wildly different monthly cash flow. But it is the same building, earning the same rent, with the same running costs. The cap rate is the same for both, and that is the point: it measures the property, not the deal you got from your lender.
Put your mortgage payment into operating expenses and the number stops being a cap rate. It becomes a muddled half-measure of your loan terms, and it cannot be compared against anything.
This is not a subtle or contested point. Every serious source on the subject says the same thing. It gets said here because it is genuinely easy to get wrong when you are looking at your own numbers and your mortgage payment is the biggest one on the page.
If what you actually want to know is what lands in your pocket each month after the loan, that is cash-on-cash return, and it is a different calculation.
Vacancy, and why it belongs in the number
It is tempting to run the number at full occupancy. Twelve months of rent, no gaps. It makes the property look better and it is almost never what happens.
Tenants leave. Places sit empty between them. Someone pays late or not at all. A vacancy allowance is how you account for that before you buy rather than after.
The effect is not small. That same house at $2,150 a month:
| Vacancy allowance | Net operating income | Cap rate |
|---|---|---|
| 0% | $16,400 | 5.75% |
| 5% | $15,110 | 5.3% |
Half a percentage point of cap rate, from one assumption. A calculation that quietly assumes zero vacancy is flattering you.
What figure to use is your call and it depends on your market, your property and how long your tenants tend to stay. If you are unsure, run it twice and look at both.
Reading your cap rate
This page will not tell you what a good cap rate is, and you should be wary of any page that does.
That is not evasion. A cap rate is only meaningful against something: another property in the same market, the same property at a different price, or the same property with different assumptions. The number that looks strong for a suburban duplex and the number that looks strong for a downtown block are not the same number, and neither is stable across markets or years.
What the number does tell you:
A lower cap rate is not automatically worse. It usually means the property is in a market where people are willing to accept a smaller return because they see it as safer or expect it to appreciate. A higher cap rate usually means the opposite: more return, more risk, or more work.
A cap rate is only as good as the expenses you put in. Understate them and the number goes up. That is the easiest way to lie to yourself with this calculator.
Compare like with like. Cap rate earns its keep when you run it on three properties with the same assumptions and see which one holds up. Run alone on one property, it is just a number.
What should I pay?
Turn the calculation around and it answers a more useful question.
If you know what the property earns and you have a cap rate in mind, the price follows:
Price = net operating income / cap rateEnter a target and the calculator does it. That house earning $15,110 a year, at a 7% target, gives $215,857.14. If it is on the market at $285,000, the gap between those two figures is the conversation you are about to have.
Use it as a sanity check rather than an offer. It assumes the income figure is right, and the income figure is an estimate built on your vacancy and expense assumptions.
One warning about how this behaves at the edges. A property earning very little produces a very low price. Take a $520,000 property renting at $2,400 a month, with a 5% vacancy allowance and $26,000 a year of running costs: the net operating income is $1,360, the cap rate 0.26%, and to reach 6% you would have to pay $22,666.67. That is arithmetically correct. The calculated price is showing you how far this property’s operating income sits from supporting its $520,000 asking price at the target you chose.
When the number comes out negative
If your running costs exceed what the property collects, the net operating income is negative and so is the cap rate. The calculator will show it rather than hiding it or rounding it to zero.
Take a $520,000 property renting at $2,400 a month with a 5% vacancy allowance and $33,000 a year of running costs:
| Effective gross income | $27,360 |
|---|---|
| Less operating expenses | $33,000 |
| Net operating income | -$5,640 |
| Cap rate | -1.08% |
That means the property loses money before you have paid a penny of mortgage. Not tight, not thin. Losing.
If you enter a target cap rate on a property in this state, the calculator will tell you the target cannot be reached at any price, because it cannot. No purchase price turns a money-losing operation into a positive return.
This is the most useful thing this page can tell you, and it is worth sitting with rather than adjusting your assumptions until it goes away. Sometimes the answer is that the rent is too low, the expenses are too high, or the deal does not work.
Common mistakes
Putting the mortgage in operating expenses. The big one. It stops being a cap rate.
Running it at zero vacancy. Flattering and unrealistic.
Forgetting maintenance in a quiet year. A roof does not care that you did not budget for it.
Mixing monthly and annual figures. The rent field has a per-month or per-year selector. Everything else on this page is annual. Get those out of step and the answer is nonsense.
Using the loan amount as the price. The denominator is what the property costs or is worth, not what you borrowed.
Comparing cap rates across markets. A 4% in one city and a 9% in another are not competing figures. They are describing different things.
Treating it as the whole answer. Cap rate ignores your financing, appreciation, principal paydown and tax treatment. It is the first look, not the last word.
Worked examples
Every figure here came from the same engine that powers the calculator.
Example 1: a single-family rental
$285,000. Rents at $2,150 a month. 5% vacancy allowance. $9,400 a year of running costs.
- Gross annual rent $25,800, less $1,290 vacancy, giving $24,510
- Less $9,400 of costs, giving a net operating income of $15,110
- Cap rate: 5.3%
Example 2: a duplex with a laundry
$410,000. Both units together bring in $3,300 a month. 6% vacancy allowance. $14,200 a year of costs. The coin laundry adds $600 a year.
- Gross annual rent $39,600, less $2,376 vacancy, plus $600 other income, giving $37,824
- Less $14,200, giving a net operating income of $23,624
- Cap rate: 5.76%
The laundry is not a rounding error. Six hundred dollars of other income is worth about 0.15 percentage points here, which is why the field exists.
Example 3: the same house at two vacancy assumptions
Example 1’s house, run at 0% and at 5%:
| 0% vacancy | 5% vacancy | |
|---|---|---|
| Net operating income | $16,400 | $15,110 |
| Cap rate | 5.75% | 5.3% |
Example 4: one that does not work
$520,000, renting at $2,400 a month, 5% vacancy, $33,000 of running costs.
- Effective gross income $27,360, less $33,000, giving -$5,640
- Cap rate: -1.08%
- A 6% target returns no price at all, because none exists
Frequently asked questions
Either, and this calculator accepts whichever you enter. Just be consistent about which one you mean. Purchase price tells you the return on what you paid. Current market value tells you the return the property is producing against what it is worth today, which is the more useful figure if you have owned it for a while.
Some investors use an all-in acquisition basis, meaning price plus closing costs plus whatever it took to make the place rentable, because that is what the deal actually cost them. It is a legitimate way to look at it and it will give you a lower, more conservative cap rate. This calculator’s price field is the purchase price or current value only. Keep it that way, because the “most you could pay” figure is a purchase price, and it stops meaning that if the field holds anything else.
The one you calculated at purchase does not, but the property’s current cap rate does, as rents and expenses move and as the property’s value changes. Running it again on today’s value and today’s numbers is a reasonable annual habit.
No. It usually signals more return alongside more risk, more work, or a weaker market. Two properties with the same cap rate can be very different propositions.
The arithmetic is identical. The judgement is not. Commercial leases, expense structures and vacancy behaviour work differently, and this page is written for residential rentals.
Often because the figures online were run at zero vacancy, with thin expense estimates, or on a different kind of property in a different market. A cap rate is only comparable to another one built on the same assumptions.
No. Cap rate ignores financing on purpose. With a mortgage, your monthly cash flow will be lower and possibly negative even on a healthy cap rate.
Disclaimers
This calculator is for information only and is not investment, tax or financial advice. It is written for residential rental property and for owners of one or two properties.
It calculates an unlevered first-year return and nothing else. It does not account for financing, mortgage payments, cash-on-cash return, appreciation, principal paydown, depreciation, tax treatment, 1031 exchanges, capital improvements, rent growth, expense inflation, seasonality, or multi-year performance. It does not blend multiple properties or model a portfolio. It does not tell you whether a cap rate is good, because that depends on your market, the property type and your own tolerance for risk.
The price field holds a purchase price or current market value, not an all-in acquisition basis.
Results depend entirely on the accuracy of the rent, vacancy and expense figures you enter, and reasonable people classify some costs differently. Check anything you plan to act on with a qualified accountant or a professional who knows your market.