Cap Rate Calculator — NOI ÷ Property Value

From rent roll to cap rate

The calculator runs a four-step chain — effective rent, operating expenses, NOI, cap rate — and the worked example walks every step. First, the vacancy allowance comes off the rent as a steady haircut: $2,200 of monthly rent less 5% leaves $2,090 of effective rent. Second, the monthly operating expenses — $650 here, and never the mortgage — are subtracted. Third, the remainder is multiplied by twelve, giving $17,280 of annual net operating income. Fourth, that NOI is divided by the $220,000 property value: the cap rate is 7.85%. Those are the two figures the result panel shows, and both are computed by the same tested engine as the calculator above. The copy on this page is generated from that engine at build time, so it cannot drift from the tool.

Read the guide: NOI and cap rate, explained walks through effective rent, the operating-expense convention, and the vacancy sensitivity of the rate in more depth than this page, with its own set of computed examples. The rest of this page is about using the calculator well: what each input does, what the output can and cannot tell you, and the misreadings that produce confident wrong answers.

What each input does

Monthly rent is the scheduled rent for the property — what it collects in a fully occupied month, entered monthly. The engine multiplies by twelve on its own, so the NOI it reports is annual even though the inputs are not.

Vacancy allowance is a percentage of that rent set aside for the time the property does not collect it. The model takes it as a smooth, continuous reduction rather than as discrete empty months, so a 5% allowance simply scales every month's rent by 95%. The field is optional and counts as zero when left blank — which means a blank field is a claim that the property is never empty, not a neutral default.

Monthly operating expenses are what it costs to run the property each month — property tax, insurance, maintenance, management, and similar recurring costs — and, by the convention the whole site follows, they exclude mortgage principal and interest. That exclusion is the point of the measure: it makes NOI and the cap rate describe the property rather than the buyer's loan.

Property value is the denominator. Enter the asking price to see the cap rate the seller's number implies, or the price you would actually pay to see yours; the property does not change between the two, only the ratio. The section on cap rate as a pricing tool shows by how much.

Vacancy moves the rate more than it looks

Because vacancy comes off the top line before anything else, a few points of allowance change the rate noticeably. Hold the headline property fixed — $2,200 rent, $650 of monthly expenses, a $220,000 value — and vary only the vacancy input. At 0% vacancy the NOI is $18,600 and the cap rate 8.45%. At the 5% used in the worked example it is $17,280 and 7.85%. At 10% it falls to $15,960 and 7.25%. The calculator does not suggest a vacancy figure; it reports the consequence of whichever one you enter, which is why running the same property at two or three allowances is more informative than running it once.

The misreading to guard against: the mortgage is not an operating expense

The expense field says "not the mortgage" because putting the loan payment there breaks the convention the ratio depends on, and the worked example shows how far it moves the result. Take the headline property financed at 20% down ($44,000), 7% for 30 years: the Rental Property Calculator computes a monthly payment of $1,170.93. Add that payment to the $650 of genuine operating expenses by mistake and the engine, doing exactly what it was told, reports $3,229 of NOI and a 1.47% cap rate — against the correct 7.85%. Nothing about the property changed. The figure that was mislabeled belongs to the buyer's financing, and financing is what the cap rate exists to leave out.

The opposite error is quieter. Leave a recurring cost out and the rate rises: enter $500 of monthly expenses instead of $650 for the same property and the NOI becomes $19,080, the cap rate 8.67%. Every dollar of monthly expense left out adds twelve dollars to the NOI, and the calculator has no way to know which costs you have forgotten — it only knows the total you typed.

Cap rate ignores financing; cash-on-cash does not

The clearest way to see what the cap rate measures is to run one property through the Rental Property Calculator under three financing structures and watch which outputs move. Bought outright for $220,000 with no closing or rehab costs, the headline property shows a 7.85% cap rate and a 7.85% cash-on-cash return — the same number, because with no loan and no other cash out the door, annual cash flow equals NOI and cash invested equals the price. Financed at 20% down ($44,000) at 7% for 30 years with $5,000 of closing costs and $3,000 of initial rehab, the cap rate is still 7.85%, but monthly cash flow is $269.07 after the $1,170.93 payment, and the cash-on-cash return on $52,000 invested is 6.21%. At 50% down ($110,000) with the same closing and rehab costs, the cap rate is again 7.85%; the payment drops to $731.83, cash flow rises to $708.17, and cash-on-cash on $118,000 invested is 7.2%.

One property, one cap rate, three cash-on-cash returns. That is the division of labor: the cap rate describes what the asset produces relative to its price, and the cash-on-cash return describes what a particular buyer's cash earns once a particular loan is layered on. Comparing two properties on cap rate is comparing the buildings; comparing them on cash-on-cash is comparing the deals as you would finance them. Each answers a question the other cannot.

Cap rate is also a pricing tool

The formula is an identity, and it runs backward as cleanly as forward. Divide the headline example's $17,280 NOI by its 7.85% cap rate and you get $220,000 — the value that was entered. Hold the NOI fixed and change the value instead: at $200,000 the same $17,280 of NOI is a 8.64% cap rate; at $250,000 it is 6.91%. A higher price for the same income is a lower cap rate, always, and by exactly this arithmetic.

Because the formula is an identity, a cap rate applied to an NOI implies a value; this calculator does not perform that step and supplies no cap rate of its own — any rate you would apply is your input, carrying whatever assumptions came with it. What the tool can do is show the sensitivity: run the same rent and expenses at the asking price and at the price you have in mind, and the gap between the two cap rates is the pricing conversation in one number. The guide NOI and cap rate, explained covers what the ratio omits as well as how it is built.

Three more properties, same arithmetic

A larger building: $4,800 of combined monthly rent, an 8% vacancy allowance, and $1,900 of monthly operating expenses on a $540,000 value gives $30,192 of NOI and a 5.59% cap rate. A unit with heavier recurring costs: $1,800 rent, 4% vacancy, and $900 of monthly expenses on a $210,000 value gives $9,936 of NOI and a 4.73% cap rate. And a property whose costs exceed its income: $1,200 rent with 5% vacancy against $1,300 of monthly expenses on a $180,000 value produces -$1,920 of NOI — negative — and a -1.07% cap rate. The engine does not refuse that case, because it is a legitimate answer: before any financing at all, the property does not cover its own operating costs. A negative cap rate is the model saying so plainly.

Where the model stops

The cap rate is a single-period snapshot of operating income against price, and the calculator models exactly that and nothing more. It does not include income taxes, depreciation deductions, appreciation, principal paydown as a return component, PMI, financing points, rent growth, or market cycles. It treats vacancy as a steady percentage rather than discrete empty months, takes expenses as one flat monthly figure rather than a schedule with lumpy repairs, and contains no closing or selling costs at either end. None of those omissions is an oversight to be patched with a mental adjustment — they are the boundary of what this ratio measures. The methodology page lists the omissions for every calculator on the site in one place.

The engine also refuses inputs it cannot interpret, and it says why in its own words. An impossible vacancy allowance is rejected with "Enter a vacancy rate of 100% or less."; a value of zero with "The property value must be greater than 0."; a negative expense figure with "The operating expenses cannot be negative." — and the calculator shows the message instead of a result, so an impossible input never produces a plausible-looking rate.

How to read the result

The panel reports two things: the cap rate, and the annual NOI it was computed from. Read them together. The NOI tells you whether the operating picture you entered is positive at all; the cap rate tells you how that income compares with the price. The calculator does not grade the result, and this page does not either: there is no threshold here at which a cap rate becomes good, because the number is a ratio of two figures you supplied, and its meaning depends on what you could do with the same money elsewhere, on the condition and prospects of the specific property, and on the accuracy of the expense line — none of which the model can see. Treat it as a screen, not a verdict.

What the ratio is genuinely good for is comparison on equal terms. Two properties run with the same expense discipline — the same categories counted, the same vacancy treatment, the mortgage left out of both — can be ranked by cap rate on their own economics regardless of how either would be financed. Two properties run with different discipline cannot, no matter how precise the decimals look. The Gross Rent Multiplier Calculator and the 1% Rule Calculator screen from gross rent alone, before vacancy or expenses; the cap rate is the first figure in the sequence that nets operating costs out, and the Rental Property Calculator is the next, adding the loan back in. For the longer walk through the whole chain, start with the guide NOI and cap rate, explained, or browse all guides.

Frequently asked questions

What is a cap rate, in plain terms?

The return a property would produce on its price if it were bought outright, before any financing: annual net operating income divided by the value. In the worked example, $2,200 of monthly rent with a 5% vacancy allowance and $650 of monthly operating expenses produces $17,280 of NOI, which on a $220,000 value is a 7.85% cap rate.

Does the calculator tell me whether a cap rate is good?

No, and deliberately. The output is a ratio of two figures you entered; whether it is attractive depends on the property, on your alternatives for the same money, and on how carefully the expense line was built — none of which the model can see. It is a screen that lets you compare properties on equal terms, not a verdict on any one of them.

I entered my mortgage payment in operating expenses — why did the cap rate drop so much?

Because the cap rate is defined to leave financing out, and the payment is financing. On the worked example, adding a $1,170.93 monthly payment (the headline property at 20% down, 7% for 30 years) to the $650 of true operating expenses drops the result from 7.85% to 1.47%. Remove the payment; the Rental Property Calculator is where financing belongs.

Why does the Rental Property Calculator show the same cap rate but a different cash-on-cash return?

Because the two measures divide different things. Cap rate is NOI over the property value and never sees the loan, so the headline property shows 7.85% whether it is bought outright or financed. Cash-on-cash is annual cash flow — after the mortgage payment — over the cash actually invested, so it changes with the financing: 6.21% at 20% down and 7.2% at 50% down in the examples above.

Can the cap rate be negative?

Yes, whenever operating expenses exceed the effective rent. The example of $1,200 rent with 5% vacancy against $1,300 of monthly expenses on a $180,000 value produces -$1,920 of NOI and a -1.07% cap rate. The engine reports it rather than hiding it: the property does not cover its own operating costs before any loan is considered.

Should I enter the asking price or the price I would pay?

Either, as long as you know which one you entered. The property's income does not change with the price, so the cap rate moves inversely with whatever value you type: the worked example's $17,280 of NOI is 8.64% at $200,000, 7.85% at $220,000, and 6.91% at $250,000. Running both prices shows what the gap between them is worth in yield.

Do I enter monthly or annual figures?

Rent and operating expenses are entered monthly; the engine multiplies the net by twelve, so the NOI it reports is annual. The vacancy allowance is a percentage of rent and applies the same way to every month. Entering annual figures in the monthly fields would overstate the NOI twelvefold, so check the units before reading the result.

What happens if I leave the vacancy allowance blank?

It counts as zero, which is a claim that the property is never empty. On the worked example that raises the cap rate from 7.85% at 5% vacancy to 8.45% at none. The calculator does not suggest an allowance; enter the figure you believe and rerun with a higher one to see how much of the result depends on it.

Not financial advice: a general educational estimate. Market cap rates vary by location, asset class, and conditions — verify with local comparables and qualified professionals. Values are processed locally in your browser and never transmitted. See the methodology page.