Cap Rate Calculator

Because cap rate is a property metric, not a buyer metric. Two people bid on the same duplex: one pays cash, one borrows 80%. The building produces the same $19,310 of net operating income for either of them, so it has one cap rate, not two. The moment debt service goes into the numerator, the “cap rate” becomes a description of someone’s loan, and comparing two properties becomes impossible.

This is also why appraisers use it. The income approach to value capitalises NOI at a market-derived rate — value = NOI ÷ cap rate — and that only works if NOI is financing-neutral.

Rearranging value = NOI ÷ cap rate shows why operators obsess over small expense lines. In a 6.5% cap market, every $1 of annual NOI is worth $15.38 of value. Cutting a $2,485 management fee by hiring a cheaper firm at 6% adds $621 of NOI — and $9,558 of value. Raising rent $50 a month adds $600 of gross rent but only $464 of NOI once vacancy, management and reserves take their share, which is still about $7,145 of value.

What is the formula for cap rate?

Cap rate = net operating income ÷ purchase price. On the worked example here, $19,310 of NOI on a $265,000 price is a 7.29% cap rate. NOI is collected rent less operating expenses, with the mortgage excluded.

Is a 7% cap rate good?

Only relative to the market and the risk. Cap rates price expected rent growth and risk, so a 4.5% cap in a supply-constrained metro and a 9% cap in a shrinking county can both be correctly priced. The useful comparison is against other properties in the same submarket, sold in the last six months, underwritten with the same expense assumptions.

Does cap rate include the mortgage?

No. Debt service is excluded on purpose. If it were included, the same building would have a different cap rate for every buyer depending on their loan, which would make the metric useless for comparing properties. Cap rate describes the asset; cash-on-cash describes your position in it.

Should I use purchase price or market value in the cap rate?

Purchase price when you are underwriting a purchase, market value when you are valuing something you already own. Both are used in practice, which is why quoted cap rates are not always comparable. This calculator also shows the all-in cap rate, using price plus closing costs plus rehab — the honest denominator for a deal that needs work.

How do you value a property from a cap rate?

Rearrange the formula: value = NOI ÷ cap rate. At $19,310 of NOI, a market trading at 6% caps values the property at $321,833; at 8% caps the same income is worth $241,375. That $80,000 swing on identical rent is why an extra $1,000 of annual NOI is worth $12,500 to $16,700 of value.

The NOI in the numerator is built on the NOI calculator page, and the leveraged counterpart to cap rate is on the cash on cash return calculator. For a quicker screen that skips expenses entirely, see gross rent multiplier.