Cap Rate Calculator

The capitalization rate — or cap rate — is the most widely used metric for evaluating the income potential of a real estate investment. It expresses the relationship between a property's Net Operating Income and its current market value, giving you a clear, financing-independent view of what a property earns relative to what it costs. A $400,000 property generating $24,000 in NOI per year has a cap rate of 6%, meaning the asset earns 6 cents on every dollar of value.

Net Operating Income is the starting point for every cap rate calculation. You arrive at NOI by subtracting all annual operating expenses from your gross rental income. Operating expenses include property taxes, landlord insurance, routine maintenance, property management fees (typically 8–10% of rent), and a vacancy allowance (usually 5–10% of gross income). What you do not include is your mortgage payment — cap rate is intentionally calculated before debt service so that the same property can be compared fairly regardless of how it is financed.

What counts as a good cap rate depends heavily on where the property is located and what asset class it belongs to. In primary markets like New York, Los Angeles, San Francisco, or Chicago, compressed cap rates of 3–5% are normal because investors accept lower yields in exchange for liquidity, appreciation potential, and lower vacancy risk. In secondary and tertiary markets, cap rates of 6–10% are common, reflecting higher yields alongside greater market risk and lower price appreciation. Use the interpretation band in this calculator as a starting benchmark, but always validate against local comparable sales.

Cap rate and cash-on-cash return are related but measure different things. Cap rate ignores financing entirely — it tells you what the property earns on a debt-free basis. Cash-on-cash return, by contrast, measures the return specifically on the cash you invested after accounting for your mortgage payment. If you put 25% down and take on a mortgage, your cash-on-cash return will differ from — and often exceed — the cap rate if you have positive leverage. To calculate cash-on-cash return, use our dedicated calculator.

Cap rate is most useful when comparing multiple properties on a level playing field — stripping out financing so you can judge each property by its operating income alone. It is also the standard metric used in commercial real estate appraisals, where properties are frequently valued by dividing NOI by the prevailing market cap rate. For a deeper rental property analysis that includes IRR, DSCR, and long-term projections, use our rental property investment analyzer.