Cap Rate Calculator

The capitalization rate, or cap rate, is one of the most widely used metrics in real estate investing. It expresses a property's annual return as a percentage of its price, based purely on the income it produces. The formula is simple: cap rate equals net operating income divided by property price. A property generating $18,000 of net operating income on a $300,000 price has a 6% cap rate.

The key input is net operating income (NOI), and getting it right matters. NOI is the property's gross rental income minus a vacancy allowance and all operating expenses — property taxes, insurance, management fees, maintenance and repairs. Crucially, NOI excludes mortgage payments. That's deliberate: by leaving out financing, the cap rate measures the property's performance on its own merits, which lets you compare two properties fairly even if one is bought with cash and the other with a loan.

What counts as a good cap rate depends on the market and the risk. Generally, cap rates between about 4% and 12% are considered reasonable, with many solid investments landing in the 6–10% range. A higher cap rate signals more income relative to price — often more cash flow, but sometimes more risk (a rougher area or older building). A lower cap rate usually means a safer, higher-demand location where investors accept less income for more stability and appreciation potential. Comparing a property's cap rate to others in the same area is far more useful than judging the number in isolation.

Cap rate has real limits worth understanding. Because it ignores financing, it doesn't reflect your actual cash-on-cash return once a mortgage is involved. It also ignores appreciation, the time value of money, future rent growth, and capital improvements. So treat it as a quick first-pass screening tool — excellent for comparing properties and spotting deals worth deeper analysis — rather than the final word on whether an investment is right for you.