Cap Rate Calculator
Ask three investors what a property is worth and the income investors reach for the same ratio: the capitalization rate, net operating income divided by price. This calculator builds NOI the way appraisers do, from gross income less vacancy, then less operating expenses, and it runs the formula in all three directions: cap rate from price, price from a market cap rate, or the NOI a target price demands.
Cap rate values the property, not your deal: financing, taxes on your income and capital replacements sit outside NOI on purpose. Pair the rate with a levered metric before deciding.
Quick Answer
Key takeaways
- Cap rate is a property metric, not a personal return: NOI excludes mortgage payments entirely, so two buyers with different loans get the same cap rate on the same building.
- Vacancy comes before expenses. Skipping the vacancy step, as many simple tools do, overstates NOI and flatters every downstream figure.
- The same formula answers three questions: the rate at a price, the price at a rate, and the NOI a price requires. The third mode, with its coverage percentage, is the negotiation tool most calculators leave out.
- Compare cap rates only inside one market and property class. A 9% cap in a weak market is the market pricing risk, not a bargain signal.
- Quick Answer
- How to use the cap rate calculator
- The cap rate formula and the road from gross income to NOI
- Worked example: one property, three questions
- What belongs in operating expenses, and what never does
- Reading the number without fooling yourself
- What competing calculators miss
- Frequently Asked Questions
- Add This Calculator to Your Website
- References
How to use the cap rate calculator
Pick the question first. Cap rate mode, the default, prices a deal you are looking at: income and asking price in, rate out. Value mode works from a market cap rate to the price the income justifies, which is the income approach an appraiser uses. NOI-needed mode starts from a target price and rate and tells you the income the property must produce, with the share of that requirement your current NOI already covers.
Every mode shares the same three income inputs, and they deserve care. Gross income is scheduled annual rent at market rates, not last month’s collections times twelve. Vacancy and credit loss is the share of that schedule you realistically lose. Operating expenses are the recurring cost of running the building, detailed in the section below. The pre-filled figures are the worked example, and nothing calculates until you press Calculate. For a full purchase workup that layers financing and cash flow on top of the rate, the buying rental property calculator takes the analysis further.
The cap rate formula and the road from gross income to NOI
The headline formula is short; the derivation in front of it is where accuracy is won or lost.
Gross scheduled income. Full annual rent at market rates: $120,000 in the example.
Less vacancy and credit loss. $120,000 x (1 – 5%) = $114,000 effective gross income.
Less operating expenses. $114,000 – $40,000 = $74,000 NOI.
Divide by price. $74,000 / $1,000,000 x 100 = 7.40% cap rate.
The definitions match supervisory practice. The OCC Comptroller’s Handbook on commercial real estate lending defines the capitalization rate as the ratio between a property’s stabilized NOI and its sales price, and effective gross income as expected revenue after vacancy and credit losses, which is exactly the two-step derivation this tool runs. Stabilized is the operative word: one freak year of income, good or bad, is not the figure to capitalize.
Worked example: one property, three questions
The calculator is pre-filled with a small multifamily case: $120,000 scheduled rent, 5% vacancy, $40,000 of operating expenses, asking price $1,000,000, market cap rate 7%.
| Mode | Question | Math | Result |
|---|---|---|---|
| Cap rate | What rate does the asking price imply? | $74,000 / $1,000,000 | 7.40% |
| Value | What is the income worth at the 7% market rate? | $74,000 / 0.07 | $1,057,143 |
| NOI needed | What must the property earn at $1,000,000 and 7%? | $1,000,000 x 0.07 | $70,000 per year |
| Coverage | How does actual NOI compare with the requirement? | $74,000 / $70,000 | 105.7%: a $4,000 surplus |
Read together, the three modes tell one story three ways: the asking price is slightly cheap for the income. The deal clears a 7% hurdle at $1,000,000, the income alone supports paying up to about $1,057,143 before the rate slips under the market figure, and there is a $4,000 income cushion. A buyer screening with the quick buy to rent ratio calculator would see the same property pass its rent-to-price test, and farmland investors run the identical derivation through the cash rent calculator when the income is land rent rather than building rent.
What belongs in operating expenses, and what never does
Include in expenses
- Property taxes and insurance
- Management fees, even if you self-manage at market rate
- Maintenance and routine repairs
- Owner-paid utilities, landscaping and cleaning
- Reserves for routine replacements, stated consistently
Keep out of NOI
- Mortgage principal and interest (debt service)
- Depreciation and amortization
- Capital expenditures such as a new roof or full renovation
- Income taxes
- Acquisition costs and loan fees
The exclusion that breaks the most amateur calculations is the mortgage. Cap rate deliberately measures the building as if bought with cash, so the return can be compared across properties and buyers; leverage belongs in cash-on-cash return, where the same $74,000 NOI on a financed purchase produces a completely different, personal number. Capital work is the subtler trap: a seller who quietly skips a needed roof from the expense story inflates NOI, and the rate with it. Ask whether quoted expenses include reserves, and hold the answer constant across every property you compare.
Reading the number without fooling yourself
A cap rate compresses income quality, location risk and growth expectations into one figure, and markets set it, not sellers. Prime urban multifamily trades at low rates because buyers accept thin current yield for durable income; the same physical building in a shrinking market needs a high rate to attract anyone. Neither is mispriced merely because the number differs from another city’s.
Two habits keep the metric honest. First, normalize the income before trusting the rate: below-market rents, a owner who skips management fees, or one year of deferred maintenance all push NOI up temporarily, and capitalizing a temporary number capitalizes the error. Second, remember what the rate ignores: financing terms, tax position, near-term capital needs and rent growth. It is the right first screen and the wrong final answer, which is why lenders pair it with debt service coverage and a stressed version of the same calculation.
What competing calculators miss
Miss 1: the missing vacancy step. A large share of ranking tools compute NOI as gross rent minus expenses, full stop. On this example that shortcut reports $80,000 of NOI and an 8.00% cap rate, overstating the true 7.40% by more than half a point, enough to misprice the building by roughly $85,000 at a 7% market rate. This tool deducts vacancy and credit loss first, as the OCC handbook derivation does.
Miss 2: one mode only. Rate-only tools cannot answer the two questions buyers actually negotiate with: what should I pay, and what must it earn. The value and required-NOI modes here run the same verified income derivation backwards, and the required-NOI mode adds the coverage percentage and shortfall or surplus in dollars.
Miss 3: no expense discipline. Tools that accept a single unexplained expense line invite the mortgage error. This page states the include and exclude lists next to the calculator and prints the exclusions again inside every cap-rate result, so the number carries its own definition with it.
One honest limit: the tool capitalizes the income you give it. Verifying that the income is real, stabilized and complete remains the buyer’s job, and no rearrangement of the formula can do it.
Frequently Asked Questions
There is no universal good number. Cap rates are set by market, property type and interest rates: prime multifamily in major metros often trades in the 4% to 6% area, secondary markets and riskier property types higher. Judge a rate against comparable recent sales in the same market, and against the quality of the NOI behind it. A high rate on declining income is a warning, not a bargain.
Because cap rate values the property independent of who buys it and how they finance it. Including debt service would make the same building show a different rate for every buyer’s loan, destroying the comparison the metric exists for. Financing enters through cash-on-cash return and debt service coverage, which are personal, levered measures.
Cap rate is the property’s unleveraged yield: NOI divided by price. Cash-on-cash is your leveraged return: annual cash flow after debt service divided by the cash you actually invested. On the worked example the cap rate is 7.40% regardless of financing; the cash-on-cash figure could be higher or lower than that depending on the loan, which is precisely why both numbers belong in an analysis.
Yes, when operating expenses exceed effective gross income, NOI is negative and so is the rate. It signals a property losing money on operations before any financing. The calculator reports it rather than flooring at zero, because a negative rate is real information about a deal, usually that the price or the expense story needs to change.
Directly and before anything else: vacancy reduces gross income to effective gross income, which reduces NOI dollar for dollar. Moving vacancy from 5% to 10% on the worked example cuts NOI from $74,000 to $68,000 and the cap rate from 7.40% to 6.80% at the same price. That sensitivity is why sellers quote optimistic vacancy and buyers should not accept it untested.
Use the price you are actually testing: the asking price when screening a listed deal, your offer price when negotiating, or a market value when appraising. The OCC handbook defines the rate against the sales price. Whichever figure you choose, hold it constant across the properties you compare, or the rates stop being comparable.
It converts a target into an income requirement: at a $1,000,000 price and a 7% target, the property must produce $70,000 of NOI. The result then reports coverage, how your actual NOI compares as a percentage, and the shortfall or surplus in dollars. In negotiation that is the most useful form of the formula, because it prices the gap between the seller’s income story and your required return.
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References
- Office of the Comptroller of the Currency, “Comptroller’s Handbook: Commercial Real Estate Lending: capitalization rate, stabilized NOI and effective gross income definitions used in bank underwriting” OCC Comptroller’s Handbook: Commercial Real Estate Lending. Accessed October 2026.
- Coastline Equity, “Cap Rate Formula: How to Calculate Cap Rate from NOI: direct capitalization practice and expense classification, citing the OCC handbook” Coastline Equity: Cap Rate Formula from NOI. Accessed October 2026.
- LD Law, “What Is a Cap Rate? Commercial Real Estate Guide: formula, worked plaza example and the limits of the payback interpretation” LD Law: What Is a Cap Rate?. Accessed October 2026.
- BE Lending, “Cap Rate Formula: Calculate Property Returns Fast: components of NOI, inclusions and exclusions” BE Lending: Cap Rate Formula. Accessed October 2026.