Cap rate (capitalization rate) measures how much income a property generates relative to its price — before financing. Investors use it to compare properties and markets on an apples-to-apples basis.
How to use this calculator
- Enter property value or purchase price.
- Enter annual rental income and annual operating expenses.
- Review net operating income and cap rate.
- Read guidance on whether the cap rate looks reasonable.
Formula
Net Operating Income (NOI) = Annual rental income − Annual operating expenses. Cap rate = NOI ÷ Property value × 100.
Example
A $400,000 property earning $36,000/year with $12,000 in expenses has $24,000 NOI and a 6% cap rate.
Frequently asked questions
- What is a good cap rate?
- Cap rates vary by market and asset type. Many U.S. residential markets fall between 4% and 8%. Higher cap rates often mean higher income but may reflect higher risk.
- Does cap rate include the mortgage?
- No. Cap rate is unlevered — it ignores financing. Use the Rental Property or Cash Flow calculator for after-debt analysis.