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Cap Rate Calculator

Work out a rental property's yearly profit before loan payments (its net operating income) and its cap rate, from value, rent, vacancy and costs.

Level: Grade 7

  • Common Core standard 7.RP.A.3Use proportional relationships to solve multistep ratio and percent problems. Examples: simple interest, tax, markups and markdowns, gratuities and commissions, fees, percent increase and decrease, percent error.
Printable worksheet

Cap Rate Calculator

Know the answer you need? Pick an input to work backward.

Inputs

Rent plus any other property income (parking, laundry) for a full year at full occupancy.

Taxes, insurance, management, repairs and any utilities you pay. Don't include mortgage payments.

Result

Capitalization rate

7.4%

A property worth $400,000.00 with $29,600.00 of net operating income has a cap rate of 7.4%.

Net operating income (per year)
$29,600.00
Effective gross income (per year)
$45,600.00
Operating expense ratio
35.1%

See the step-by-step solution ↓

Step-by-step solution

  1. Start with full-occupancy rent, then take off your vacancy allowance. This is the rent you expect to actually collect

    $48,000.00×1−0.05=$45,600.00

  2. Subtract the yearly running costs. What's left is net operating income (NOI), the profit before loan payments

    NOI=$45,600.00−$16,000.00=$29,600.00

  3. Divide that profit by the property's value to see what it earns per dollar of price. As a percent, that's the cap rate

    $29,600.00$400,000.00=0.074=7.4%

Test yourself

20 quick questions built from this calculator's formula: work out results, predict what happens when an input changes, and work backward from an answer. Every answer comes with the working.

Please note: Results are estimates for planning and comparison. Lenders, banks, and tax authorities may round differently or include fees not modeled here, so confirm figures with your provider before deciding.

What this calculator does

See how much a rental property earns each year for every dollar it's worth. That figure is the capitalization rate, or cap rate. It's the yearly income the property makes from renting, divided by what the property is worth. Think of it as the return you'd earn if you paid all cash, with no mortgage. Investors use it as a quick way to compare rental properties of different sizes.

First, the calculator works out net operating income (NOI), the profit from running the property before any loan payments. It starts with the rent you'd collect if every unit were full. Next it takes off an allowance for empty units and unpaid rent. Then it subtracts the costs of running the property. Last, it divides NOI by the value or asking price to give the cap rate.

Where it's used

Why this math matters outside the classroom:

  • Valuing a rental. A building with $24,000 of net operating income and a $400,000 value has a 6% capitalization rate.
  • Vacancy allowance. Investors cut gross rent of $36,000 by a 5% vacancy allowance to $34,200 before subtracting operating expenses.
  • Comparing listings. Buyers put two properties with different prices and rents on the same footing by comparing their cap rates.
  • Appraisal work. Appraisers divide net operating income by a market cap rate to estimate what an income property is worth.

Grade level and standards: Grade 7; Common Core State Standards for Mathematics 7.RP.A.3. © Copyright 2010. National Governors Association Center for Best Practices and Council of Chief State School Officers. All rights reserved.

How to use it

  1. Enter the property's market value, or the price you're thinking of paying.
  2. Enter the gross yearly income if every unit were rented. Include rent and any other income the property earns.
  3. Enter an allowance for vacancy and unpaid rent ("credit loss") as a percent. Then enter the total yearly operating expenses.
  4. Read the cap rate, the net operating income and the operating expense ratio (the share of collected income that goes to running costs).

What the inputs mean

Property value or price
Use the purchase price to judge a deal. Use a current market value to track a property you already own.
Gross annual rental income
Rent plus any other property income (parking, laundry) for a full year at full occupancy.
Vacancy and credit loss
An allowance for units sitting empty between tenants, and for rent you never collect. Local vacancy data or the property's own history is the best guide. 5% to 10% is a common planning range.
Annual operating expenses
Property taxes, insurance, property management, maintenance and repairs, utilities the owner pays, landscaping and savings set aside for replacements. Leave out mortgage principal and interest, depreciation and income tax.

Formula and method

Effective gross income = Gross income × (1 − vacancy)
NOI = Effective gross income − Operating expenses
Cap rate = NOI ÷ Property value × 100

Gross income is the full-occupancy rent. Effective gross income is what you actually expect to collect. You enter vacancy as a percent, and the calculator uses it as a decimal (5% becomes 0.05). NOI, net operating income, is what's left of a year's collected income after running costs, but before any loan payments.

Because financing is left out, the cap rate compares properties on their own merits. It doesn't matter how each buyer pays for them. Turned around, the same formula estimates value: Value = NOI ÷ cap rate.

Worked example

A small apartment building is listed at $400,000. It would bring in $48,000 a year fully rented. You allow 5% for vacancy, and operating expenses are $16,000 a year.

  1. Effective gross income: $48,000 × (1 − 0.05) = $45,600.
  2. Net operating income: $45,600 − $16,000 = $29,600.
  3. Cap rate: $29,600 ÷ $400,000 = 0.074, or 7.40%.
  4. Operating expense ratio: $16,000 ÷ $45,600 ≈ 35.1%.

Result: At the asking price, the building's cap rate is 7.40%, on net operating income of $29,600 a year.

Understanding the result

A higher cap rate means more income for each dollar of price. That can signal a better deal, but it often reflects more risk. Think of an older building, a weaker location or less reliable tenants. A lower cap rate usually goes with properties that buyers see as safer, or likely to grow in value.

Cap rates work best when you compare similar properties in the same market at the same time. If your figure is well above the local norm, double-check the expense estimates before you treat it as a bargain.

Assumptions and limitations

  • All income and expense figures cover the same twelve months.
  • Vacancy is a flat percentage of gross income.
  • Operating expenses leave out loan payments (debt service), depreciation, major upgrades (capital improvements) and income taxes.
  • Nothing is rounded inside the calculation.
  • The cap rate is a snapshot of a single year. It ignores rent growth, future repairs, resale value and the fact that money later is worth less than money now.
  • It says nothing about the return on your own cash when you buy with a loan. Use the cash-on-cash return calculator for that.
  • Results are only as good as the income and expense estimates. Figures from sellers often leave out costs.

Frequently asked questions

What is a good cap rate?

There's no single good number. Cap rates vary by property type, location and interest rates. Compare your figure with recent sales of similar properties nearby. Then weigh it against how risky and how well kept the property is.

Why are mortgage payments left out of the expenses?

The cap rate measures the property's own earning power. Two buyers with different loans would get the same cap rate on the same building. Measures such as cash-on-cash return take the loan into account.

How can I use a cap rate to estimate a property's value?

Divide net operating income by a typical cap rate for similar properties. For example, $29,600 of NOI at a 7% cap rate suggests a value of about $422,857. You can also use the solve-for option on the value field.

What is the difference between cap rate and ROI?

Cap rate compares one year of operating income with the price. Return on investment (ROI) usually counts everything you gain while you own the property, compared with what you put in. That includes growth in value (appreciation) and the loan you've paid down.

How this calculator is checked

Method: Standard real estate definitions: effective gross income, net operating income and capitalization rate = NOI ÷ value. The calculation is covered by automated tests with known reference values and edge cases. Last updated 2026-10-18. Found a problem? Tell us.

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