Cap Rate Calculator
Evaluate real estate investments by calculating your Net Operating Income (NOI) and Capitalization Rate.
If you are buying an investment property, looking at the raw purchase price isn't enough to tell you if it is a good deal. Real estate investors use the Capitalization Rate (Cap Rate) to measure a property's natural rate of return and quickly compare multiple properties against each other.
Our free Cap Rate Calculator takes the guesswork out of property analysis. Simply enter the purchase price, your expected annual rent, and your itemized operating expenses. The calculator will automatically deduct vacancy losses to find your Effective Gross Income (EGI), subtract your expenses to find your Net Operating Income (NOI), and instantly generate your true Cap Rate.
How to Use the Cap Rate Calculator
- Property Value: Enter the exact purchase price or the current market value of the building.
- Gross Annual Rent: Enter the total amount of rent you expect to collect in one year if the building is 100% occupied.
- Vacancy Loss: No building is fully rented 100% of the time. Enter a standard vacancy rate (usually between 5% and 10%) to account for empty months and unpaid rent.
- Operating Expenses: Enter your yearly costs to run the building, including Property Taxes, Landlord Insurance, Maintenance, HOA fees, and Property Management fees.
- Hit Calculate: Instantly view your Net Operating Income (NOI) and Cap Rate percentage!
How is Cap Rate Calculated?
The Cap Rate formula is actually very simple, but finding the exact numbers to plug into it requires a few steps.
Step 1: Find the Net Operating Income (NOI)
First, you must subtract all of your operating expenses and vacancy losses from your total rental income. The money left over is your NOI.
- Formula: Gross Income - Vacancy Loss - Operating Expenses = NOI
Step 2: Calculate the Cap Rate
Once you have your NOI, you divide it by the property's purchase price and multiply by 100 to get a percentage.
- Formula: (NOI / Property Value) × 100 = Cap Rate
Example
Let's say you are looking to buy a duplex for $500,000.
- The building generates $60,000 a year in total rent.
- You assume a 5% vacancy rate ($3,000 lost).
- Your taxes, insurance, and maintenance add up to $12,000 a year.
First, find the NOI: $60,000 - $3,000 - $12,000 = $45,000 NOI.
Next, find the Cap Rate: ($45,000 / $500,000) × 100 = 9% Cap Rate.
What is a "Good" Cap Rate?
A common question among new investors is, "What cap rate should I aim for?" The truth is, a "good" cap rate depends entirely on your strategy and the location of the property. Cap rate is a measure of risk and return.
| Cap Rate Range | Risk Level | Market Type | What It Means |
| 3% - 5% | Low Risk | Class A / Major Cities | Safe investments in highly desirable, expensive cities (like NYC or LA). You make less cash flow, but the property holds its value. |
| 5% - 8% | Medium Risk | Class B / Suburbs | The "sweet spot" for most investors. Solid cash flow in stable, growing neighborhoods. |
| 8% - 12%+ | High Risk | Class C / Rural | High potential for cash flow, but usually involves older buildings, higher maintenance costs, or less desirable locations. |
Frequently Asked Questions (FAQs)
Does the Cap Rate include my mortgage payment?
No! This is the most common mistake new investors make. Cap Rate calculates the return on the property as if you paid in cash. Your mortgage payment (debt service) is entirely dependent on your personal financing terms, not the building's performance. Therefore, a mortgage is never included in the Cap Rate formula.
Are income taxes included in operating expenses?
No. Property taxes are included, but your personal state and federal income taxes are not.
Why is my Cap Rate negative?
If your Cap Rate is a negative percentage, it means your operating expenses (taxes, maintenance, insurance) are higher than the rent you are collecting. This property has a negative cash flow and is losing money every month.