Cap rate calculator
Enter the price, the rent and the running costs to get the property’s capitalization rate: the yearly return it would produce if you paid all cash.
Cap rate
6.12%
Mid-range yield, typical of many established markets
- Yearly rent at full occupancy
- $28,800
- Vacancy allowance
- − $1,440
- Operating expenses
- − $9,000
- Net operating income
- $18,360
- Divided by purchase price
- $300,000
How it is calculated
Cap rate = Net operating income ÷ Purchase price
- Net operating income (NOI)
- A year of rent, less vacancy, less operating expenses. The mortgage is not an operating expense and is left out.
- Operating expenses
- Property tax, insurance, repairs and maintenance, management fees, HOA dues, and utilities the owner pays.
- Purchase price
- What you pay for the property, or its current market value if you already own it.
Worked example
- A duplex is listed at $300,000 and rents for $2,400 a month in total, which is $28,800 a year.
- Allowing 5% for vacancy leaves $27,360 of collected rent. Operating expenses are $9,000 a year, so net operating income is $18,360.
- $18,360 ÷ $300,000 = 6.12% cap rate.
What is a good cap rate?
There is no single good number, because cap rate measures risk as much as return. Sought-after neighborhoods in large cities often trade at low cap rates, since buyers accept less income in exchange for stability and price growth. Smaller markets and older buildings trade at higher cap rates to compensate for more vacancy, more repairs and slower appreciation.
The useful comparison is against similar properties nearby. If comparable rentals in the area sell at about 6% and the one you are looking at shows 8%, check the rent and expense figures before assuming it is a bargain. Understated expenses are the most common reason a cap rate looks too good.
Cap rate ignores your loan. Two buyers with different down payments get the same cap rate on the same property, so use it to compare properties, and use cash-on-cash return to judge your own deal.
Common questions
Does cap rate include the mortgage?
No. Cap rate is calculated from net operating income, which excludes loan payments. That is what makes it useful for comparing properties regardless of how each buyer finances the purchase.
Is a higher cap rate better?
A higher cap rate means more income per dollar of price, but it usually comes with more risk: weaker locations, older buildings or less reliable tenants. A lower cap rate usually signals a safer, more expensive market.
What expenses should I include?
Include property tax, insurance, maintenance and repairs, property management, HOA dues and any utilities you pay as the owner. Leave out mortgage payments, income tax and depreciation.
How do I work out a property’s value from its cap rate?
Divide the net operating income by the cap rate. A property producing $18,000 of NOI in a market where similar buildings sell at a 6% cap rate is worth about $300,000.