How to Use the Cap Rate
Cap rate is the fastest way to compare income properties regardless of how they're financed — it strips out your mortgage and simply asks: what does this property earn relative to what it costs? This calculator computes your Net Operating Income (NOI) and cap rate in seconds, and shows what your NOI implies about fair value at a target cap rate.
Step-by-Step Guide
- 1
Enter the purchase price (or current market value) of the property.
- 2
Enter the gross annual rental income the property generates.
- 3
Set a vacancy & credit loss % to reflect realistic, not 100% occupied, income.
- 4
Add annual operating expenses — taxes, insurance, maintenance, management fees. Do not include mortgage payments; cap rate is calculated before financing.
- 5
Review your NOI, cap rate, and implied value at a target cap rate.
Cap Rate Formula
Effective Gross Income = Gross Income − Vacancy & Credit Loss NOI = Effective Gross Income − Operating Expenses Cap Rate = (NOI ÷ Purchase Price) × 100
Worked Example
Price: $400,000. Gross income: $42,000. Vacancy: 5%. Operating expenses: $12,000. Vacancy Loss = 5% × $42,000 = $2,100 Effective Gross Income = $42,000 − $2,100 = $39,900 NOI = $39,900 − $12,000 = $27,900 Cap Rate = $27,900 ÷ $400,000 = 6.98%
Understanding your result
Calculator results depend entirely on the information entered. For the most useful estimate, use current and accurate figures and include all costs that apply to your specific situation.
Frequently Asked Questions
What is a good cap rate for rental property?
It depends heavily on market and asset class. Stable, low-risk markets often see 4–6% cap rates; higher-risk or higher-yield markets can see 8–12%. Compare within the same market and property type rather than using one universal target.
Does cap rate include the mortgage payment?
No — cap rate is calculated on NOI before any mortgage or debt service, which is exactly what makes it useful for comparing properties independent of how each buyer chooses to finance them.
What's the difference between cap rate and cash-on-cash return?
Cap rate uses the full purchase price and ignores financing. Cash-on-cash return uses only your actual cash invested (down payment + closing + repairs) and accounts for mortgage payments — it's more relevant once you know your financing terms.
How do I calculate NOI?
NOI = Effective Gross Income (rental income minus vacancy losses) minus operating expenses like property tax, insurance, maintenance, and property management. Mortgage principal, interest, and capital expenditures are excluded.
Why do cap rates vary by market?
Cap rates reflect perceived risk and expected appreciation. Low cap rates usually mean investors expect strong appreciation and stability (major metros); high cap rates usually compensate for higher risk, lower growth, or more management-intensive assets.