📊 Cap Rate Calculator
Cap rate strips out financing to show a property's raw yield. Enter income and expenses to get NOI and cap rate.
How Cap Rate Works
The capitalization rate answers: if I paid all cash, what annual yield would this property produce? Because it ignores mortgages, cap rate lets you compare a $150k duplex in Ohio with a $900k condo in Austin on equal footing.
The Formula
NOI = Gross Rent − Vacancy − Taxes − Insurance − Maintenance − Management
Note what is excluded: mortgage payments, depreciation, and income taxes. Those are financing and tax choices, not property performance. Typical US residential cap rates run 4–8%: lower in hot coastal markets (you pay for appreciation), higher in cash-flow markets.
Worked Example
$350,000 property, $36,000 gross annual rent. Expenses: vacancy 5% ($1,800), tax ($4,200), insurance ($1,800), maintenance ($2,400), management 8% ($2,880) = $13,080. NOI = $36,000 − $13,080 = $22,920. Cap rate = $22,920 ÷ $350,000 = 6.55% — a solid cash-flow-market yield.
Reading Cap Rates Like an Investor
Cap rate = return in a world without leverage — which makes it the purest comparison tool across properties and markets. Typical bands: 4–6% for core coastal multifamily, 6–8% for secondary markets, 8–12%+ for value-add or tertiary assets — higher always means higher risk, never free return. Critical: NOI must exclude debt service, income taxes, and capital expenditures; including them understates or overstates yield. Compare a property's cap rate to the going-in vs. stabilized distinction — value-add deals quote today's (low) cap and tomorrow's (higher) pro-forma cap; underwrite the path between them. Cap rates also set value: at a 6% market cap, every $10,000 of additional NOI is worth ~$167,000 — which is exactly why forced appreciation through NOI growth is the professional's game.
Cap rate compression is how markets make investors rich without lifting a finger: if you buy at an 8% cap and the market compresses to 6%, your property's value rises ~33% on identical income. That's why buying in path-of-progress neighborhoods at high going-in caps — then riding compression — is the classic wealth-building trade.
Frequently Asked Questions (FAQs)
What is a good cap rate?
4–5% is typical in expensive coastal markets, 6–8% in cash-flow markets, 8%+ in higher-risk or rural areas. Higher cap rate = higher yield but usually higher risk or lower appreciation.
Is cap rate the same as ROI?
No. Cap rate ignores financing; cash-on-cash ROI includes your mortgage and down payment. A 6% cap rate property can produce a 10%+ cash-on-cash return with leverage — or go negative with too much leverage.
Why is mortgage payment excluded from NOI?
Because financing is a buyer choice, not a property characteristic. Two buyers paying different down payments get the same NOI but different cash flow — cap rate isolates the asset itself.
Can I use cap rate to value a property?
Yes, inversely: Value = NOI ÷ market cap rate. If similar properties trade at a 7% cap and yours produces $21,000 NOI, it is worth about $300,000. This is the income approach to valuation.
Does cap rate include appreciation?
No — cap rate measures current income yield only. Total return adds appreciation, principal paydown, and tax benefits on top.
Last updated: September 2026