Cap Rate Calculator

What is a cap rate?

A cap rate, short for capitalization rate, estimates a property's annual operating income as a share of its price. This cap rate calculator uses rent, vacancy, operating expenses, and purchase price to give you a quick way to assess a rental property.

The formula is cap rate = net operating income / price. Net operating income, or NOI, is the property's income after operating costs and vacancy losses, but before mortgage payments. The result is shown as a percentage. A higher figure means more NOI relative to the price used in the calculation, but it does not by itself mean a property is a better investment.

Why cap rate matters

Cap rate gives you a common measure for comparing properties with different prices or rents. It can help you decide which properties deserve a closer look, whether an asking price fits the income, and how changes in rent or expenses affect the deal.

It is not the same as your cash-on-cash return or monthly cash flow. Cap rate does not account for your loan, down payment, closing costs, income taxes, major renovations, or future changes in property value. Use it as one part of your analysis, not as a forecast of what you will take home.

Consider reviewing the property’s condition, local rental demand, financing, and likely repair costs before making an offer. A real estate or financial professional can help you assess an investment decision based on your circumstances.

How to use this cap rate calculator

1. Enter the property's purchase price. Use the same price basis when you compare results for other properties.
2. Enter the monthly rent you expect to collect. Base it on a realistic rental plan rather than assuming the property is always occupied.
3. Enter the vacancy percentage to account for rent you may lose when the property is empty or tenants do not pay.
4. Enter yearly operating expenses. Include costs of running the property, such as property taxes, insurance, routine repairs, maintenance, and management fees. Do not include mortgage payments in operating expenses.
5. Review the NOI and cap rate. Change an input to see how a different rent, vacancy assumption, expense budget, or price affects the result.

Cap rate calculator example

How to read your cap rate result

The cap rate is a comparison between annual NOI and the price you entered. A higher result can reflect stronger income, lower expenses, a lower price, or a combination of those factors. A lower result can reflect weaker income, higher expenses, a higher price, or a combination.

There is no single cap rate that is right for every property. Compare similar properties in the same market and consider differences in condition, tenant demand, and expected costs. You can also compare the result with your own estimates under different rent and expense assumptions. The existing FAQ answer notes that higher cap rates generally mean higher return and usually higher risk; a percentage alone cannot show the full risk of a particular property.

How to improve a property's cap rate

1. 01

   Increase reliable rental income

   Check whether the rent reflects the property's condition and local demand. Consider making targeted upgrades that tenants value, then set rent using realistic local comparisons. Avoid assuming a rent increase will work if it could leave the property vacant.

2. 02

   Reduce vacancy and unpaid rent

   Keep the property in good repair, respond promptly to maintenance issues, and use a consistent tenant screening and lease process. These steps can help protect occupied months and reduce avoidable rent losses.

3. 03

   Review operating costs

   Compare insurance, maintenance, management, and service contracts. Ask providers about renewal terms, and address recurring repair problems rather than repeatedly paying for the same issue. Do not cut maintenance that protects the property or tenant safety.

4. 04

   Assess the purchase price

   If the income and costs do not support the asking price, consider negotiating or passing on the property. A lower price raises the calculated cap rate when NOI stays the same, but it does not remove property or market risks.

Common cap rate mistakes

• Leaving out vacancy or expenses

  Using full rent as if every month were occupied, or forgetting costs such as insurance and routine repairs, overstates NOI. Use a realistic vacancy assumption and include the property's recurring operating costs.

• Including mortgage payments in operating expenses

  Cap rate is calculated before financing. Including mortgage payments in operating expenses changes the measure and makes it harder to compare properties with different loan terms.

• Treating the result as guaranteed profit

  NOI is not the same as spendable cash. Financing, major repairs, taxes, and changes in rent or value affect your actual outcome, even when the cap rate looks attractive.

• Comparing different price bases

  A cap rate calculated with an asking price may not be comparable to one based on a different property value. Keep the price basis consistent and check that each property's income and expense assumptions are comparable.

The cap rate formula

Key terms

Cap rate

Net operating income divided by the property's price, expressed as a percentage.

Net operating income

Rental income after vacancy losses and operating expenses, before mortgage payments.

Vacancy loss

Rent you expect to lose when the property is unoccupied or rent is not collected.

Operating expenses

Recurring costs of running and maintaining the property, not including mortgage payments.