A cap rate calculator divides a property’s yearly net operating income by its price to give the capitalization rate, or works backward from a cap rate to a value. Formula: Cap rate = net operating income ÷ price; value = net operating income ÷ cap rate. A building with $24,000 of NOI priced at $300,000 has an 8.00% cap rate; at a 6% cap rate, the same NOI implies a $400,000 value.
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How to use the cap rate calculator
- Choose what to solve: the cap rate from a price, or the value from a cap rate.
- Enter the yearly net operating income.
- Enter the price, or the target cap rate.
The cap rate calculator returns the rate to two decimals, or the value in dollars.
What formula does the cap rate calculator use?
Cap rate = NOI ÷ price × 100. Value = NOI ÷ (cap rate ÷ 100). NOI is gross rent plus other income, minus vacancy and operating expenses such as taxes, insurance, repairs, management and utilities you pay. Mortgage payments, depreciation and income tax are not part of NOI, which is why a cap rate compares properties as if they were bought with cash.
Cap rate calculator worked example
Results from the cap rate calculator:
| Mode | NOI | Price or cap rate | Result |
|---|---|---|---|
| Cap rate | $24,000 | $300,000 | 8.00% |
| Cap rate | $54,000 | $900,000 | 6.00% |
| Value | $24,000 | 6% cap rate | $400,000 |
The third row shows why cap rates matter to sellers: the same income is worth $300,000 at 8% but $400,000 at 6%.
Working out NOI
Start with a full year of rent at realistic occupancy, then subtract every operating cost. A quick NOI example: $36,000 of rent minus 5% vacancy ($1,800) and $10,200 of expenses gives $24,000. Ask a seller for actual income and expense records rather than a pro forma, and check property tax bills, since taxes can be reassessed after a sale.
What is a good cap rate?
There is no single good number. Cap rates differ by market, property type and risk, and change as interest rates move. A higher cap rate means more income per dollar but often more risk or a weaker location. Use the cap rate calculator to compare similar properties in the same area, not a duplex in one city with an office building in another.
Cap rate versus cash-on-cash return
Cap rate measures the property; cash-on-cash measures your investment. If you buy the $300,000 example with a loan, your yearly cash flow after the mortgage divided by the cash you put in is your cash-on-cash return. It can be higher or lower than the cap rate depending on the loan rate. When the loan rate is above the cap rate, borrowing usually lowers your cash return. When it is below, borrowing can raise it, though it also adds risk.
Investors often look at both numbers, plus a debt service coverage ratio, before making an offer.
Common mistakes to avoid
Common mistakes: using gross rent instead of NOI, leaving out vacancy, or including the mortgage payment as an expense. Another is relying on the seller’s projected rents. Base NOI on actual leases and the last twelve months of expenses. If the property tax will be reassessed at your purchase price, use the new estimated tax bill rather than the old one, since it can change the cap rate noticeably.
Small changes in NOI move value a lot at low cap rates. At 6%, each $1,000 of extra yearly NOI adds about $16,667 of value.
What a cap rate leaves out
Cap rate ignores financing, future rent growth, big repairs and the tax effect of depreciation. For a financed deal, look at cash flow and cash-on-cash as well; our BRRRR calculator and rental property calculator include the mortgage. Rental income and expenses are reported on Schedule E, as IRS Publication 527 explains.
Estimates for education only, not tax, legal or financial advice. Check current rules with the tax authority or a qualified adviser.
Related converters and calculators
Related calculators:
- Rental property calculator: rental return
- ROI calculator: return on investment
- Real estate calculator: property math
Sources
IRS Publication 527: Residential rental property; IRS Topic 415: Renting residential and vacation property.
Questions about this calculator
How do you calculate cap rate?
Divide yearly net operating income by the price and multiply by 100.
Does NOI include the mortgage payment?
No. Debt payments are left out, so the cap rate shows the return as if you paid cash.
How do I value a property from a cap rate?
Divide NOI by the cap rate as a decimal: $24,000 ÷ 0.06 = $400,000.
Is a higher cap rate better?
It means more income per dollar, but often comes with more risk.
What expenses go into NOI?
Vacancy, taxes, insurance, repairs, management and owner-paid utilities.
Check the assumptions and units before relying on a result. Financial, tax and health estimates do not replace advice for your individual circumstances.
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