What this calculator does
The cap rate is the unlevered yield on a property: net operating income divided by value. It deliberately ignores financing, so two buyers with different mortgages still see the same cap rate on the same building.
It works as a valuation tool in reverse as well. If comparable properties trade at a 6 per cent cap rate, a building producing $23,940 of net operating income is worth about $399,000 regardless of what the asking price says.
The formula
Gross rent is reduced by the vacancy rate to give effective gross income, then by the expense ratio to give net operating income. Dividing that by the property value gives the cap rate.
| Term | Meaning |
|---|---|
| Net operating income | Rent after vacancy and operating expenses, but before mortgage payments and tax. |
| Cap rate | Net operating income as a percentage of value, the unlevered return. |
| Effective gross income | Gross rent reduced for expected vacancy. |
The inputs explained
| Field | What to enter |
|---|---|
| Gross annual rental income ($) | Gross annual rental income at full occupancy. |
| Operating expenses (% of gross income) | Operating expenses as a percentage of gross income. Rates, insurance, management and maintenance, but not mortgage payments. |
| Vacancy rate (%) | Expected vacancy rate as a percentage. |
| Property value / purchase price ($) | The property value or purchase price. |
| Target cap rate for comparison (%) | A target cap rate from comparable sales, used to imply a value. |
When to use it
Comparing investment properties
Cap rate puts properties of different sizes and prices on one basis.
Valuing from comparable sales
Applying a market cap rate to a property's income gives an independent view of what it is worth.
Assessing an asking price
A cap rate well below the local market suggests the price is optimistic.
Worked examples
Every figure in the tables below is produced by this page’s own calculator at build time, so the numbers and the tool always agree. Select any row to load that scenario.
What cap rate does each purchase price give?
The same income stream at three purchase prices.
| Purchase price | Cap rate | Net operating income |
|---|---|---|
| $350k | 6.84% | $23,940.00 |
| $400k | 5.99% | $23,940.00 |
| $500k | 4.79% | $23,940.00 |
Questions
What is a good cap rate?
It depends heavily on location and property type. Prime locations trade at low cap rates because buyers accept less income for lower risk; secondary markets trade higher. Compare against genuinely local sales rather than a national figure.
Why exclude mortgage payments?
Because the cap rate is meant to describe the property, not the buyer. Two buyers with different loans would otherwise get different answers on the same building, which would make comparison impossible.
Does a high cap rate mean a better investment?
Not necessarily. High cap rates usually compensate for higher risk: weaker locations, older buildings, or less reliable tenants. The yield and the risk generally move together.
Should capital expenditure be in the expenses?
Strictly, no. Operating expenses cover running costs, while major capital works are treated separately. Many investors deduct a reserve anyway, which gives a more conservative and often more honest figure.
For a quicker screen before expenses, see the gross rent multiplier calculator. For whether the income covers the loan, see the DSCR calculator.