Cap Rate Calculator
Cap Rate measures a rental property's return independent of how it's financed — useful for comparing properties on a level playing field regardless of down payment size or loan terms.
Cap Rate Calculator
Net Operating Income
$14,400
Cap Rate
5.76%
Cap Rate = (Annual Rental Income − Annual Operating Expenses) ÷ Purchase Price × 100. Operating expenses should not include mortgage payments.
How to calculate Cap Rate
Cap Rate (short for capitalization rate) = Net Operating Income (NOI) ÷ Purchase Price × 100. NOI is annual rental income minus operating expenses — taxes, insurance, HOA, vacancy loss, property management, and repairs/maintenance — but excluding the mortgage payment. That's the key difference from Cash-on-Cash ROI, which does include financing costs. Cap Rate answers "how well does this property perform on its own," while Cash-on-Cash answers "how well does it perform for the cash I actually put in." See the Cash-on-Cash Return Calculator for that side of it.
What is a good Cap Rate for a rental property?
There's no universal number — Cap Rate is heavily market-dependent. In general, higher-priced, lower-risk markets (major metros, stable neighborhoods) tend to trade at lower Cap Rates (often 4-6%), while higher-risk or lower-cost markets tend to trade higher (7-10%+) to compensate investors for added risk or management burden. The most useful way to use Cap Rate is comparatively — against other properties in the same market, not as an absolute pass/fail number.
Worked example
A $250,000 property generating $24,000/year in rent with $9,600/year in operating expenses has an NOI of $14,400 — a Cap Rate of 5.76%. Change the numbers in the calculator above to see how Cap Rate moves with purchase price, rent, or expenses.
Limitations of Cap Rate
Cap Rate ignores financing entirely — two investors buying the identical property with different down payments and loan terms get the same Cap Rate but very different actual cash flow and returns. It's also only as reliable as the expense estimate behind it; leaving out a real cost (vacancy, CapEx reserves) inflates NOI and overstates the Cap Rate. Use it to screen and compare deals quickly, then run a full rental property analysis before committing.
FAQ
Does Cap Rate include the mortgage payment?
No — NOI is calculated before financing costs. That's what makes Cap Rate useful for comparing properties independent of how each one is financed.
Is a higher Cap Rate always better?
Not necessarily. Higher Cap Rates often come with higher risk — rougher neighborhoods, older properties, or less-liquid markets. Compare Cap Rate alongside the property's condition, location, and tenant quality, not in isolation.
How is Cap Rate different from Cash-on-Cash Return?
Cap Rate ignores financing; Cash-on-Cash Return is built entirely around it, measuring return against the actual cash you invested rather than the full purchase price.