Cap Rate Calculator
Capitalization rate — annual net operating income divided by property value. The financing-independent yield that lets you compare any two investment properties on their own economics.
Cap rate
Example: $2,200 rent, 5% vacancy, $650 expenses on a $220,000 property → 7.85%.
From rent roll to cap rate
In the worked example, $2,200 of monthly rent less a 5% vacancy allowance leaves expected income of $2,090. Subtracting $650 of monthly operating expenses gives $17,280 of annual net operating income. Divide by the $220,000 property value and the cap rate is 7.85% — computed by the same tested engine as the calculator above.
Cap rate is also a pricing tool
Run the equation backward: if comparable properties in a market trade at a 7% cap rate and a building produces $17,280 of NOI, its market-implied value is NOI ÷ 0.07 ≈ $246,857. That's how income property is actually priced — and why verifying the seller's expense numbers matters so much: every dollar of overstated NOI inflates the implied price by roughly fourteen dollars at that cap rate.
Frequently asked questions
What is a cap rate, in plain terms?
The return a property would produce if you bought it outright in cash: annual net operating income divided by the price. A $220,000 property producing $17,280 of NOI yields a 7.85% cap rate. Because financing is excluded, cap rates let you compare properties on their own economics.
What is a good cap rate?
It is a price signal more than a grade. Higher cap rates usually mean more perceived risk or weaker growth prospects (older buildings, tougher markets); lower cap rates accompany safer, high-demand assets. Many residential rentals trade in the 4–8% range, but the honest benchmark is other comparable properties in the same market, not a universal number.
Why is the mortgage excluded from NOI?
Because financing belongs to the buyer, not the building. Two investors buying the same property with different loans face identical NOI but very different cash flows. NOI isolates what the asset itself produces; your loan then determines how much of it you keep — which is what the cash-on-cash return measures.
Cap rate or cash-on-cash — which should I use?
Both, for different jobs. Use cap rate to judge and compare the asset (and to sanity-check a seller’s asking price). Use cash-on-cash to judge the deal as financed — what your actual invested cash earns. The Rental Property Calculator computes the two together.
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.