Cap Rate Calculator

How the cap rate calculator works

Cap rate answers one deceptively simple question: if you paid cash for this property, what annual return would its income produce? Because it ignores financing entirely, it lets you line up a small single-family rental next to a large apartment block and compare them fairly. This calculator builds the number in two stages — first it works out the net operating income, then it divides that by the price.

The net operating income is where most of the care goes. We start from the gross rent, add any other income, subtract a vacancy allowance to reflect the real world, and then take off the operating expenses. Crucially, the mortgage is not one of those expenses — cap rate stops at NOI on purpose. Once you have the cap rate, pair it with the cash-on-cash return calculator to see the leveraged return on your own cash, and the DSCR calculator to check the property covers its loan.

How to read your cap rate

A cap rate is only meaningful next to its market. In many residential markets, rentals change hands somewhere around 4% to 8%, but the “right” number swings with location, property type and interest rates. As a rule of thumb, a higher cap rate means more income per dollar of price — attractive on paper, but often a sign of higher risk, an older building or a softer area. A lower cap rate usually points to a prime, in-demand property where buyers accept a smaller yield for stability. Always compare against similar properties nearby rather than a single fixed target.

Cap rate vs cash-on-cash and DSCR

These three numbers answer different questions and work best together. Cap rate measures the property's return ignoring debt. Cash-on-cash return folds in your mortgage and measures the return on the actual cash you invested. DSCR checks whether the rent covers the loan payment. A property can have a healthy cap rate yet a thin DSCR if it is highly leveraged, which is why serious investors look at all three before committing.

Using cap rate to price a deal

The formula runs both ways. If you know the going cap rate for comparable properties, you can rearrange it to estimate value: value = NOI ÷ cap rate. A property with $20,000 of NOI in a market where similar assets trade at 6% is worth roughly $333,000. This is exactly how appraisers and investors back into a price, and it is why rising interest rates — which push required cap rates up — tend to pull property values down even when rents hold steady.

Pro forma, going-in and exit cap rates

You will hear cap rate described three ways, and the difference matters. The going-in (or actual) cap rate uses the property's real, current NOI — the trustworthy number. A pro forma cap rate uses a projected NOI after planned rent rises or cost savings, so it flatters the deal; treat a seller's pro forma as a best case and confirm the actual income before you rely on it. The exit (or reversion) cap rate is the rate you assume a future buyer will pay when you sell — nudging it up even half a point can erase years of gains, so keep it realistic, usually a touch higher than today's going-in rate. A quick rule: buy on the going-in number, stress-test with a slightly higher exit rate, and never pay today for tomorrow's pro forma.

Estimate only — not investment advice. Operating costs, vacancy and market cap rates vary widely by location; use local figures and confirm expenses before relying on any result.

How to use it & key terms

Enter the price, rent, vacancy allowance and each annual operating expense, then press Calculate to see the effective income, total expenses, NOI and the cap rate.

Cap rate mistakes that trip up new investors

The cap rate formula is so simple that the mistakes never live in the arithmetic — they live in the two numbers you feed it. A tidy-looking percentage built on optimistic inputs is more dangerous than no number at all, because it lends false confidence to a shaky deal. None of the common errors are exotic; they are ordinary shortcuts that make a property look better than it is, and a cap rate only supports fair comparison when its inputs are consistent and conservative. A handful of recurring ones account for most of the trouble:

• Taking the seller's expenses at face value. Listing figures often omit or understate costs, so rebuild the operating expenses from your own assumptions before trusting the result.
• Leaving out management when you self-manage. Your time has value; a property that only works because you run it for free is not truly earning what the cap rate implies.
• Ignoring capital reserves. Roofs, heating systems and water heaters are not operating expenses, but they are real, and a cap rate that pretends they never come due overstates the return.
• Understating vacancy. Assuming full, uninterrupted occupancy inflates both the income and the cap rate; use a realistic allowance for empty and unpaid months.
• Dividing by the asking price. The denominator should be a defensible value, not whatever the seller hopes to get.

The through-line is that a cap rate is only as honest as the net operating income behind it, so the antidote to every item above is the same: do your own homework on the inputs. Before comparing two properties, put both on identical footing — the same vacancy logic, the same reserve for big-ticket repairs, and a management cost whether or not you intend to hire it out. Compare like with like, too; a suburban single-family home and an older multifamily in a different market are not interchangeable just because their cap rates match. And resist reading a strikingly high cap rate as an automatic bargain — more often it is the market pricing in higher risk, a weaker location or deferred maintenance. Done consistently, this turns the cap rate from a number that can flatter a bad deal into one that protects you from it.