Calculate the cap rate for any rental property by entering your gross rental income, operating expenses, vacancy rate, and property value. You'll get back the capitalization rate, net operating income (NOI), and a clear breakdown of your annual income — helping you evaluate whether a property is a smart investment.
Cap Rate
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Effective Gross Income
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Net Operating Income (NOI)
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Total Annual Expenses
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Expense Ratio
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Cap rate, short for capitalization rate, is a metric used to evaluate the profitability of a real estate investment. It represents the annual rate of return a property generates relative to its value, expressed as a percentage. It is calculated by dividing the net operating income (NOI) by the property's current market value or purchase price.
The cap rate formula is: Cap Rate = Net Operating Income (NOI) ÷ Property Value × 100. The NOI is calculated as your effective gross income (gross rental income minus vacancy losses) minus all operating expenses. Mortgage payments are not included in this calculation.
A good cap rate typically falls between 4% and 10%, though this varies significantly by market and property type. In high-demand urban markets, cap rates of 4–6% are common. In smaller or higher-risk markets, investors may expect 8–12%. A higher cap rate suggests greater potential return but may also indicate higher risk.
No — cap rate does not include mortgage payments. It is calculated using net operating income, which only accounts for property-related operating expenses like maintenance, taxes, insurance, and management fees. This makes cap rate a useful comparison tool regardless of how a property is financed.
Since property value can be estimated as NOI ÷ Cap Rate, an increase in net operating income directly increases the implied property value. For example, if the local market cap rate is 8% and your NOI rises from $20,000 to $25,000, the estimated property value would increase from $250,000 to $312,500.
Cap rate allows investors to quickly compare the relative value and return potential of different properties — regardless of location or price. It serves as a benchmark for evaluating whether a listing is fairly priced, helps estimate what a property should sell for based on its income, and highlights how sensitive property values are to changes in rental income or market conditions.
Vacancy rate reduces your effective gross income, which in turn lowers your NOI and therefore your cap rate. Even a small increase in vacancy — say from 2% to 8% — can meaningfully reduce your returns. Always factor in a realistic vacancy rate when evaluating a property rather than assuming 100% occupancy.
Yes. If you know the prevailing cap rate in a local market, you can estimate a fair property value by dividing the NOI by that cap rate. For example, if your property generates $33,600 in NOI and the market cap rate is 9.7%, the implied value is approximately $346,000. This approach is widely used in commercial real estate valuation.