Cap Rate Calculator
Calculate the capitalization rate, net operating income (NOI), and cash on cash return for any real estate investment. Our free cap rate calculator helps you analyze property returns instantly.
Annual Gross Income: $54,000
Industry average is 5-10% for residential rentals
Effective Gross Income
$51,300
After vacancy adjustment
Total Operating Expenses
$17,520
32.4% of gross income
Gross Income
$54,000
Total Expenses
$17,520
Net Operating Income (NOI)
$33,780
Monthly NOI
$2,815
Capitalization Rate
6.76%
Good return for stable markets
What is Cap Rate in Real Estate?
Cap rate (short for capitalization rate) is one of the most important metrics in real estate investing. It measures the rate of return on a real estate investment property based on the income that the property is expected to generate. Think of it as the property's yield if you paid all cash.
The cap rate provides a standardized way to compare different investment properties regardless of their size, location, or financing terms. A higher cap rate generally indicates a higher potential return but may also signal higher risk, while a lower cap rate typically suggests a more stable investment in a premium location.
How to Calculate Cap Rate
Cap Rate Formula:
Cap Rate = (Net Operating Income ÷ Property Value) × 100Here's a step-by-step example of how to calculate cap rate:
- Determine property value: $500,000 (purchase price or current market value)
- Calculate gross annual income: $4,500/month × 12 = $54,000/year
- Subtract vacancy loss (5%): $54,000 × 0.95 = $51,300 effective gross income
- Calculate operating expenses: Taxes ($6,000) + Insurance ($2,400) + Maintenance ($3,600) + Management ($4,320) + Other ($1,200) = $17,520
- Calculate NOI: $51,300 - $17,520 = $33,780
- Calculate cap rate: $33,780 ÷ $500,000 = 6.76%
Understanding Net Operating Income (NOI)
- • Rental income
- • Parking fees
- • Laundry income
- • Other property income
- • Minus: Property taxes
- • Minus: Insurance
- • Minus: Maintenance costs
- • Minus: Property management fees
- • Minus: Utilities (if landlord-paid)
- • Mortgage payments (principal & interest)
- • Income taxes
- • Depreciation
- • Capital expenditures
- • Tenant improvements
- • Leasing commissions
These are excluded to allow fair comparison between properties regardless of financing.
What is a Good Cap Rate?
The "right" cap rate depends on your investment goals, risk tolerance, and market conditions. Here's a general guide:
Higher Risk / Higher Return
- • Secondary/tertiary markets
- • Value-add properties
- • Shorter lease terms
- • Less creditworthy tenants
Balanced Risk / Return
- • Growing suburban markets
- • Stable properties
- • Medium-term leases
- • Regional tenants
Lower Risk / Lower Return
- • Major metro areas
- • Trophy properties
- • Long-term NNN leases
- • National credit tenants
Cap Rate vs. Cash on Cash Return
| Metric | Cap Rate | Cash on Cash Return |
|---|---|---|
| Formula | NOI ÷ Property Value | Annual Cash Flow ÷ Cash Invested |
| Considers Financing? | No | Yes |
| Best For | Comparing properties | Actual return on your money |
| Typical Range | 4% - 12% | 8% - 20%+ |
Use cap rate to compare properties objectively. Use cash on cash return to understand your actual returns based on how you finance the purchase.
Factors That Affect Cap Rates
Property Factors
- Location: Prime locations command lower cap rates due to lower perceived risk
- Property Type: Retail, industrial, office, and multifamily have different typical cap rates
- Age & Condition: Newer properties often have lower cap rates
- Tenant Quality: National credit tenants justify lower cap rates
- Lease Terms: Longer lease terms reduce risk and cap rates
Market Factors
- Interest Rates: Rising rates typically push cap rates higher
- Economic Conditions: Strong economies support lower cap rates
- Supply & Demand: High demand markets have compressed cap rates
- Alternative Investments: Bond yields affect real estate pricing
- Market Sentiment: Investor confidence impacts cap rate expectations
Frequently Asked Questions
What is a cap rate in real estate?
Cap rate (capitalization rate) is the ratio of a property's net operating income (NOI) to its current market value or purchase price. It measures the potential return on a real estate investment as if it were purchased with all cash, expressed as a percentage.
How do you calculate cap rate?
Cap Rate = (Net Operating Income / Property Value) × 100. For example, a property worth $500,000 with an NOI of $40,000 has a cap rate of 8% ($40,000 ÷ $500,000 = 0.08 or 8%).
What is a good cap rate for investment property?
A good cap rate typically ranges from 4% to 12%, depending on location, property type, and risk tolerance. Premium locations often have 4-6% cap rates, while secondary markets may offer 8-12%. Higher cap rates indicate higher potential returns but often come with increased risk.
Does cap rate include mortgage payments?
No, cap rate does not include mortgage payments. It uses Net Operating Income (NOI), which is calculated before debt service. This allows investors to compare properties regardless of financing method. To account for financing, use the cash on cash return metric.
Do cap rates rise with interest rates?
Generally, yes. When interest rates rise, the cost of financing increases, making leveraged real estate investments less attractive. This typically pushes cap rates higher as buyers require more return to compensate for higher borrowing costs.
What does a 7.5% cap rate mean?
A 7.5% cap rate means you can expect a 7.5% annual return on the property value from the net operating income. For a $400,000 property, this would be $30,000 in annual NOI ($400,000 × 0.075 = $30,000).
Find Your Next NNN Investment
Browse our curated selection of triple net lease properties from national credit tenants with attractive cap rates.
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View all calculatorsImportant Disclaimer
This cap rate calculator is provided for informational and educational purposes only. Results are estimates based on the inputs provided and should not be considered financial, legal, or tax advice. Actual returns may vary based on property condition, market changes, financing terms, and other factors. Always consult with qualified real estate professionals, attorneys, and accountants before making investment decisions.