Deal Analysis
Cap Rate Calculator
Calculate net operating income and capitalization rate for any rental property.
Annual income & expense breakdown
| Item | Amount |
|---|
How rental property returns work
Cap rate, short for capitalization rate, is one of the most widely used metrics for comparing rental property investments. It measures a property unlevered yield — the return it generates before financing — so you can judge the deal itself rather than the loan behind it. The formula is straightforward: cap rate = net operating income divided by property value, expressed as a percentage. A higher cap rate means more income relative to price, which usually signals either a stronger return or more risk. To get there you first compute net operating income (NOI). Start with annual gross rental income, subtract a vacancy allowance to arrive at effective gross income, then subtract all operating expenses — property tax, insurance, maintenance, property management, and HOA fees. NOI does not include the mortgage payment; cap rate is intentionally a financing-independent number. Cap rate is best used as a comparison tool. If two similar properties in the same market have cap rates of 5% and 7%, the second produces more income per dollar of price. But cap rate alone does not tell the whole story: it ignores appreciation, tax benefits, leverage, and the cost of capital. In high-appreciation markets, investors often accept lower cap rates because they expect values to rise. In cash-flow markets, 6–10% is common. You can also work the formula in reverse. If you know your target cap rate and a property NOI, the implied value — NOI divided by target cap rate — tells you what price to offer to achieve that return. That makes cap rate useful both for screening deals and for backing into an offer price.
Worked example
Suppose you are evaluating a duplex listed for $320,000. It rents for $3,200 per month, or $38,400 per year. You assume a 5% vacancy rate, so effective gross income is $38,400 × (1 − 0.05) = $36,480.
Annual operating expenses are property tax $3,600, insurance $1,400, maintenance $2,000, property management $3,072 (8% of gross rent), and HOA $0. Total operating expenses are $10,072.
NOI = $36,480 − $10,072 = $26,408. Cap rate = $26,408 / $320,000 = 8.3%. If your target cap rate is 7%, the implied value is $26,408 / 0.07 = $377,257 — meaning at a 7% target you could pay up to roughly $377k and still hit your goal.
Frequently asked questions
What is a good cap rate for a rental property?
It depends on the market and your risk tolerance. In strong cash-flow markets, 6–10% is common. In high-appreciation coastal markets, cap rates of 3–5% are normal because investors expect values to rise. There is no single "good" number — cap rate is best used to compare similar properties in the same market.
Does cap rate include the mortgage payment?
No. Cap rate is an unlevered metric, meaning it ignores financing. NOI is calculated before the mortgage payment, and cap rate is NOI divided by property value. To see the return on your actual cash invested after financing, use cash-on-cash return instead.
What is the difference between cap rate and cash-on-cash return?
Cap rate measures the property return regardless of financing — NOI divided by property value. Cash-on-cash return measures your leveraged return — annual cash flow (after the mortgage) divided by the cash you invested. Cap rate compares deals; cash-on-cash compares your invested capital.
How do I use the implied value at a target cap rate?
If you know your required cap rate and a property NOI, implied value = NOI divided by target cap rate. That tells you the maximum price you can pay to achieve your target return. If the asking price is below implied value, the deal meets your goal; if above it, you would need to negotiate the price down or raise income.
Should I use itemized expenses or a single total expense figure?
Itemizing gives a more accurate NOI because it forces you to account for every cost. If you already know your total annual operating expenses from a pro forma or prior ownership, entering a single total figure is faster and produces the same cap rate. The calculator supports both approaches.
More Deal Analysis tools
- Rental Property Calculator Analyze cash flow, cash-on-cash return, cap rate, and GRM for any rental property.
- Cash-on-Cash Return Calculator Measure the annual return on the actual cash you put into a rental property deal.
- Rental Yield Calculator Calculate gross and net rental yield to compare income relative to property price.
- Gross Rent Multiplier Calculator Screen deals fast with the gross rent multiplier and implied price at a target GRM.
- 1% Rule Calculator Check whether a rental deal meets the 1% rule and see the rent needed to pass.
- ARV Calculator Estimate after-repair value and maximum allowable offer for a fix-and-flip or BRRRR deal.