Cap Rate Calculator

How cap rate works — both directions

Capitalization rate is the single most-used shorthand in income real estate. It answers one question: if you paid all cash, what annual return would this property's operations produce? The formula is simple — cap rate = net operating income ÷ property value — but its power is that it strips out financing entirely, letting you compare a duplex you'd buy with 25% down against an all-cash fourplex on equal footing.

The same equation runs backward, which is where the "reverse cap rate" comes in. If you know the income and you know the return you require, you can solve for price: value = NOI ÷ target cap rate. This is exactly how commercial appraisers and experienced investors set their maximum offer — they decide the yield they need first, then let the income dictate the price rather than the other way around. Toggle the calculator above into reverse mode to work this way.

Worked example — both ways

A property rents for $2,400/month ($28,800/year). With 6% vacancy, effective income is $27,072. Operating expenses — $3,600 tax, $1,400 insurance, maintenance at 8% ($2,166), management at 9% ($2,436) — total about $9,602. That leaves NOI of roughly $17,470. Forward: at a $300,000 price, cap rate = $17,470 ÷ $300,000 = 5.8%. Reverse: if you require a 6.5% return, the most you'd pay is $17,470 ÷ 0.065 = $268,800 — nearly $31,000 below the asking price. That gap is the negotiation.

What counts as a good cap rate?

• 4–5%: Prime properties in expensive coastal markets. Low income yield, priced for appreciation and stability.
• 5–7%: The broad middle — solid single-family and small multifamily in healthy metros. Most buy-and-hold investors live here.
• 7–10%: Secondary markets, value-add plays, and older assets. Higher income, more management and risk.
• 10%+: Often a warning as much as an opportunity — tertiary markets, deferred maintenance, or optimistic income assumptions. Verify the NOI carefully.

A higher cap rate is not automatically better. It usually reflects higher risk, weaker appreciation prospects, or a less liquid market. The "right" cap rate is the one that compensates you for the specific risk of the specific property.

The mistake that breaks every cap rate

NOI is where cap rates go wrong. It must include all operating expenses — vacancy, maintenance, management, taxes, insurance, and reserves — but must never include your mortgage payment. Listing agents love to advertise cap rates built on a "pro forma" NOI that assumes zero vacancy and skips management and maintenance. Rebuild the NOI from the real expense lines (this calculator forces you to) before you trust any cap rate you're quoted. A property advertised at an 8% cap frequently pencils out closer to 5.5% once honest expenses go in.

Cap rate vs. the other return metrics

Cap rate ignores financing, so it's the wrong tool for measuring your actual return on a leveraged purchase — that's what cash-on-cash return is for. Use cap rate to compare properties and to value income streams; use cash-on-cash to measure what your deployed cash actually earns. The two answer different questions, and serious analysis uses both.

Want the leveraged picture too? The rental property calculator adds a mortgage and returns cash flow and cash-on-cash return, and the sale proceeds calculator shows what you'd net if you sold. Cap rate is a screening tool — verify income and every expense line with real documents before making an offer.

Frequently asked questions