Cap Rate Calculator

What Is Cap Rate and How Is It Calculated?

Capitalization rate (cap rate) is the ratio of a property's net operating income (NOI) to its purchase price or market value. The formula is simple: Cap Rate = NOI / Property Value × 100. It tells you the annual return you would earn if you bought the property outright with no financing.

NOI is your gross rental income minus vacancy losses and operating expenses (taxes, insurance, maintenance, management). It does not include mortgage payments — that is intentional. By stripping out financing, cap rate lets you compare properties on equal footing regardless of how each deal is structured.

What Is a Good Cap Rate?

It depends on the market and property type. In expensive coastal markets, cap rates of 3-5% are common. In the Midwest and Southeast, 7-10% is achievable. Higher cap rates generally mean higher returns but also higher risk — a 12% cap rate property is probably in a less desirable area or needs significant work.

Most investors look for cap rates of 5-8% for single-family rentals in stable markets. But cap rate alone does not tell the full story. A property with a 6% cap rate and strong appreciation potential might be a better investment than an 8% cap rate property in a declining market. Use cap rate as a screening tool, then dig deeper with our rental property calculator for a full cash flow analysis including financing. To quickly screen deals before running cap rate, try the 1% rule calculator.

Cap Rate vs. Cash-on-Cash Return

Cap rate and cash-on-cash return both measure investment performance, but they answer different questions. Cap rate ignores financing entirely — it tells you what the property earns relative to its price. Cash-on-cash return includes your mortgage and tells you what your actual out-of-pocket dollars earn.

A property might have a 6% cap rate but deliver a 12% cash-on-cash return because leverage amplifies your returns. Or it could have a 7% cap rate but only a 4% cash-on-cash if the mortgage payments eat into cash flow. Use cap rate to compare properties, then use cash-on-cash return to see what you actually earn after financing.

What Expenses Go Into NOI?

Net operating income is gross rent minus vacancy losses and operating expenses. Operating expenses typically include property taxes, insurance, maintenance and repairs, property management fees (usually 8-10% of rent), and any HOA dues. They do not include mortgage payments, capital expenditures, or income taxes.

A common shortcut is the 50% rule: assume operating expenses will be roughly 50% of gross rent. This is a rough estimate, but it works well enough for quick screening. For a more detailed breakdown, use our rental property calculator where you can input each expense line item.