Cap Rate Calculator

The Formula

The cap rate measures the unlevered rate of return on an income-producing property, independent of how the purchase is financed. It answers the question: "If I paid all cash for this property, what annual percentage return would the rental income generate?" Higher cap rates indicate more income relative to the purchase price but often reflect higher perceived risk, weaker location quality, or older property condition.

Variable Definitions

How to Use This Calculator

1. 1

   Enter the property purchase price or current market value and the gross annual rental income at full occupancy.

2. 2

   Enter your estimated vacancy rate; 5-10% is typical for residential properties while commercial properties may see 10-15% vacancy.

3. 3

   Enter each expense category individually for the most accurate Net Operating Income. Missing key expenses like maintenance or property management will inflate the cap rate.

4. 4

   Review the calculated cap rate and its label — 6% or higher is generally considered good in most residential markets, while 3-5% is typical for luxury urban properties.

5. 5

   Check the Expense Ratio and Gross Rent Multiplier outputs for additional insight into the property's efficiency and relative value.

6. 6

   Use the break-even occupancy output to understand the minimum occupancy needed to cover all operating expenses before any debt service.

Cap Rate = Net Operating Income / Property Value — the unlevered return on real estate

Understanding the Concept

Cap rate is the most widely used metric for evaluating and comparing real estate investment opportunities across different markets and property types. The formula is straightforward: Net Operating Income divided by Property Value, expressed as a percentage. NOI is calculated by taking the gross annual rent, subtracting vacancy losses (typically 5-10% of gross rent), and then subtracting all recurring operating expenses including property taxes, insurance, maintenance, property management fees, HOA dues, and any landlord-paid utilities. A key rule of cap rate analysis is that mortgage payments are never included in the calculation, because cap rate is designed to measure the property's inherent income-generating potential independent of how an individual buyer chooses to finance it. This allows apples-to-apples comparisons between cash buyers and leveraged buyers. Cap rates vary widely by market and property class. In prime urban coastal markets like New York, San Francisco, or Los Angeles, cap rates typically range from 3% to 5% because property values are elevated relative to rents. In secondary and tertiary markets, cap rates of 6% to 10% are common, reflecting lower property values and sometimes higher perceived risk. It is critical to compare cap rates only within the same market and asset class, as comparing a 4% cap rate in Manhattan to an 8% cap rate in rural Ohio is not meaningful without accounting for risk, appreciation potential, and property condition. The Gross Rent Multiplier (GRM) provides a useful secondary screen: GRM is the property price divided by gross annual rent, and lower values generally indicate better value. The Expense Ratio (operating expenses divided by effective gross income) helps assess how efficiently a property is managed, with ratios under 50% considered healthy.

Frequently Asked Questions

Sources & References