This cap rate calculator compares a property's annual net operating income with its purchase price or value. Enter an existing NOI, build one from rent and expenses, estimate value from a target cap rate, or find the income a price would need to support.
The useful comparison is consistent income divided by consistent value. Keep financing outside NOI, use a full year of income and expenses, and check that vacancy and major replacements receive the same treatment across the properties you compare. All examples below are hypothetical; the displayed rates are not market surveys.
How to use the cap rate calculator
- Choose the result you need: cap rate, property value, or required NOI.
- For cap rate, enter the purchase price or current value. A purchase analysis and a current-value analysis answer different questions, so label your basis.
- Enter annual NOI directly if you have a reliable operating statement. Otherwise enter monthly scheduled rent, vacancy and collection loss, other collected annual income, and annual operating expenses.
- For a value or income target, supply your own cap-rate assumption from relevant comparable transactions or an appraiser.
- Review the value sensitivity chart, then copy the result link to preserve your inputs.
The builder is deliberately simple: its expense input is an annual total. For itemized property taxes, insurance, maintenance, management and debt payments, use the rental property cash flow calculator and bring its annual NOI here.
Cap rate formula and reverse calculations
cap rate (%) = annual NOI ÷ property value × 100property value = annual NOI ÷ (cap rate ÷ 100)required annual NOI = property value × cap rate ÷ 100
A 6% rate means $6 of annual property operating income for each $100 of value under the stated assumptions. It does not mean the owner receives $6 after financing, reserves or income tax. Value mode requires positive NOI and a positive cap rate; dividing by zero has no useful valuation interpretation.
The federal banking agencies' direct-capitalization guidance describes value as stabilized annual income divided by a capitalization rate. Stabilized income means an estimate at normal occupancy and rents, which may differ from the latest operating year. Keep a trailing actual NOI and a stabilized forecast separate rather than quietly replacing one with the other.
What belongs in net operating income?
The builder calculates effective income = annual scheduled rent × (1 − vacancy %) + other collected income, then subtracts annual operating expenses. Vacancy includes anticipated rent loss; other income is already a collected amount. Do not apply vacancy again to a rent figure that is already net of that loss.
| Item | Treatment in this tool |
|---|---|
| Rent, parking, laundry and similar income | Include expected collectible property income. |
| Property taxes, insurance, management, utilities and routine maintenance | Include in operating expenses. |
| Mortgage principal and interest | Exclude from NOI; deduct later in owner cash flow. |
| Depreciation and investor income tax | Exclude from this operating-income calculation. |
| Roof replacement and other capital work | Budget separately from routine expenses. |
| Capital replacement reserve | Exclude from this NOI; disclose separately. |
| Refundable security deposit | Exclude from collected operating income. |
Fannie Mae's operating-analysis form separates income, expenses, capital items and debt service. Institutional reserve definitions vary, so the calculator's displayed convention matters. IRS rental rules are useful for distinguishing expenses, improvements and refundable deposits, but a tax return is not itself an NOI statement.
Worked example: a $300,000 rental
Assume scheduled rent of $2,500.00 a month, 5% vacancy and collection loss, $1,200.00 of annual other income and $11,700.00 of annual operating costs.
| Step | Annual amount |
|---|---|
| Scheduled rent | $30,000.00 |
| Vacancy and collection loss | −$1,500.00 |
| Other income | +$1,200.00 |
| Effective gross income | $29,700.00 |
| Operating expenses | −$11,700.00 |
| NOI | $18,000.00 |
| NOI ÷ $300,000.00 | 6.00% |
For the same price, a 7% target would require $21,000.00 NOI, or $3,000.00 more than this estimate. Reducing the purchase price can improve the calculated cap rate without changing the building's income; reducing uncollectible rent or recurring costs changes the operating result itself.
How cap-rate changes affect value
Value moves inversely with the rate when NOI is held constant. The relationship is nonlinear: a one-percentage-point rate change does not mean a one-percent value change.
| Illustrative cap rate | Value at $18,000.00 NOI |
|---|---|
| 4% | $450,000.00 |
| 5% | $360,000.00 |
| 6% | $300,000.00 |
| 7% | $257,142.86 |
| 8% | $225,000.00 |
Moving from 6% to 7% reduces the implied value by $42,857.14, even with unchanged rent and expenses. Test both income and the market rate when evaluating an exit; assuming only future rent growth hides half of the valuation risk.
Cap rate vs cash flow and cash-on-cash return
Cap rate isolates the property's operating yield. Cash flow deducts financing and planned reserves. Cash-on-cash then compares the owner's annual cash flow with cash invested. The metrics complement one another.
For a separate hypothetical rental with the rental tool's defaults, annual NOI is $19,320.00, annual debt service is $13,652.67, and annual replacement reserves are $1,500.00. Available annual cash flow is $4,167.33. Substituting that final cash-flow number into the cap-rate formula would mix financing with property performance.
Use the cash-on-cash return calculator to evaluate the cash you commit. For a renovation and resale project, the house flipping calculator evaluates a one-time project profit instead of annual rental yield.
Common mistakes and limits
- Using gross rent as NOI. Taxes, insurance, vacancy and operating costs must come out first.
- Mixing actual and forecast income. A full-occupancy forecast can make a struggling property look better than its current operation.
- Ignoring owner labor or deferred maintenance. A self-managed or neglected property can report low costs that a new owner cannot reproduce.
- Comparing incompatible denominators. Price, current appraised value and total cost after improvements produce different measures.
- Choosing a universal “good” cap rate. These pages do not supply a market benchmark; comparable properties and risk matter.
One-year capitalization cannot fully describe lease-up costs, changing rents, major construction, sale costs or uneven future cash flows. Use a period-by-period analysis for those situations and confirm the assumptions with an appraiser or property professional. The result is a transparent scenario, not a guaranteed return or appraisal.
Frequently asked questions
How do I calculate cap rate?
Divide annual net operating income by the property price or value and multiply by 100. $18,000.00 of annual NOI on a $300,000.00 property produces a 6.00% cap rate.
Does cap rate include mortgage payments?
No. This calculator measures income from the property before debt service. The loan changes the cash flow to the owner, so use the rental cash flow and cash-on-cash tools to evaluate financing.
Is a higher cap rate always better?
No. Compare the income assumptions, condition, location, tenancy and capital needs. A higher stated cap rate can reflect a lower price or greater risk, and it can also result from omitted expenses.
How do you calculate property value from cap rate?
Divide positive annual NOI by the cap rate as a decimal. At $18,000.00 NOI and a 6% cap rate, the implied value is $300,000.00. This is a scenario, not an appraisal.
Is cap rate the same as cash-on-cash return?
No. Cap rate divides property NOI by property value. Cash-on-cash divides the owner's annual pre-tax cash flow after debt service by the cash invested. Closing costs, reserves and financing can make those percentages differ.
Are replacement reserves included in NOI?
Conventions vary. Here NOI excludes capital replacement reserves, and the rental cash flow tool deducts them separately. Use the same treatment for the subject property and comparable cap rates.
Can the cap rate be zero or negative?
Yes, if operating expenses equal or exceed effective income. A zero or negative NOI can produce a zero or negative rate, but this tool does not infer a positive property value by capitalizing that income.
Is this an interest-rate cap calculator?
No. Capitalization rate compares property income with value. An interest-rate cap is a separate financial contract used to limit exposure to a rising benchmark rate on floating-rate debt.
Sources & method
- OCC / federal banking agencies — 2023 CRE policy, Appendix 3: direct capitalization and stabilized income (PDF, p. 19)
- Fannie Mae — Form 4254 definitions: effective income, operating expenses, capital expenditures and debt service (PDF)
- IRS Publication 527 — rental income, deposits, expenses and depreciation
- JPMorgan Chase — cash-on-cash return and financing
Results are estimates for general information. Found an error? It helps everyone — see our methodology.