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Cap Rate Calculator

Calculate capitalization rate (cap rate) for any investment property. Enter NOI or gross rent, vacancy rate, operating expenses, and purchase price — get cap rate, implied property value at market cap rates, and gross rent multiplier (GRM) instantly.

Cap Rate Calculator

Calculate the Capitalization Rate for any investment or commercial property. Cap rate removes the effect of financing — it evaluates the property itself, not your mortgage.

Property Value / Purchase Price

Current market value or acquisition price

Gross Annual Rental Income

Total rent collected at 100% occupancy

Annual Operating Expenses

Taxes, insurance, maintenance, management

Vacancy Rate (%)

Expected % of time unit sits vacant

Effective Gross Income (EGI) = $60,000 − ($60,000 × 5%) = $57,000

Net Operating Income (NOI) = $57,000 − $15,000 = $42,000

Cap Rate = NOI / Value = $42,000 / $500,000 = 8.40%

Eff. Gross Income

$57,000

after 5% vacancy

Net Operating Income

$42,000

after all operating expenses

Cap Rate

8.40%

Strong Value-Add

Market Context

Above-market return — typical for B-class properties, secondary markets, or value-add plays.

Income & Expense Breakdown

Line Item	Amount	% of GRI
Gross Rental Income (GRI)	$60,000	100.0%
− Vacancy Loss	-$3,000	5.0%
= Effective Gross Income	$57,000	95.0%
− Operating Expenses	-$15,000	25.0%
= Net Operating Income (NOI)	$42,000	70.0%

Implied Property Value at Different Cap Rates

At 5% cap rate

$840,000

Core Market

At 7% cap rate

$600,000

Value-Add

At 9% cap rate

$466,667

High Yield

Based on your NOI of $42,000. Investor-required cap rate determines what they'll pay.

Practical Example

$500K apartment building: $60K GRI, $15K expenses, 5% vacancy:
EGI = $60,000 − $3,000 = $57,000
NOI = $57,000 − $15,000 = $42,000
Cap Rate = $42,000 / $500,000 = 8.4%

Inverse relationship in action: If market cap rates compress to 6% (due to rising demand), this same $42,000 NOI would support a value of $42,000 / 0.06 = $700,000 — a $200K price increase with zero improvement to the property.

💡 Field Notes

Cap rate is unlevered: It intentionally ignores mortgage financing. Two investors can buy the same property — one all-cash, one with 80% leverage — and they get the same cap rate. This makes cap rate the cleanest comparison tool across properties, regardless of how you finance them. Your actual cash-on-cash return (which does include debt service) will be very different from the cap rate.
The cap rate / value inverse: This is the single most important concept for CRE investors. When the Fed raises rates, institutional investors require higher cap rates to compete with bonds. To achieve a higher cap rate on the same NOI, the purchase price must go down. This is why rising interest rates mechanically suppress real estate values — not just through financing costs, but through the required return compression on every transaction.
What cap rate doesn't measure: Cap rate is a snapshot of current income, not future potential. Value-add properties are often purchased at a high cap rate based on current (depressed) rents, with the business plan being to renovate units and re-lease at market rates. The pro-forma cap rate (based on stabilized future NOI) is what actually matters for those deals — always ask for the stabilized projection.

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What is Cap Rate: The Financing-Agnostic Language of Commercial Real Estate Valuation?

The capitalization rate (cap rate) is the most universally used metric in commercial real estate because it strips out the effects of financing and taxes to reveal what the asset itself earns relative to its price. Cap rate = NOI / Price. A 6% cap rate means the property generates $6 of net operating income for every $100 of asset value — as an unlevered, before-financing return. This financing-agnostic perspective enables comparison between a $500K duplex and a $50M office complex on equal footing. Cap rate is the real estate equivalent of the earnings yield (E/P) in equities — and like P/E ratios, lower cap rates mean investors are paying more per dollar of income, typically reflecting lower perceived risk, higher quality, or higher growth expectations.

Mathematical Foundation

Capitalization Rate

\text{Cap Rate} = \frac{\text{NOI}}{\text{Market Value}} \times 100\%

\text{NOI}

= Net Operating Income — the annual income from the property after all operating expenses but before mortgage payments and income taxes. NOI = Effective Gross Income (EGI) − Operating Expenses. EGI = Gross Rent × (1 − Vacancy Rate). Operating expenses include: property taxes, insurance, property management fees (typically 8–12% of EGI), maintenance and repairs, utilities (if landlord-paid), landscaping, pest control. Explicitly excluded from NOI: mortgage principal and interest payments (debt service), income taxes, depreciation, and capital expenditures. This exclusion makes NOI — and therefore cap rate — financing-agnostic: the same property has the same cap rate whether the buyer pays all cash or uses 80% leverage.

\text{Market Value}

= Purchase price or current appraised market value — the total unlevered cost of acquiring the property (before financing). Use the actual negotiated purchase price for a current deal; use the appraised value for an existing holding. Do not reduce by down payment — cap rate is always calculated on the total asset value, not the equity portion. This is what makes cap rate comparable across different deal structures: two investors buying the same property at the same price will have identical cap rates regardless of their financing terms.

Implied Property Value from Market Cap Rate

\text{Value} = \frac{\text{NOI}}{\text{Market Cap Rate}}

\text{Market Cap Rate}

= The prevailing cap rate for comparable properties in the same submarket and asset class. This is determined by recent comparable sales — what price did similar properties sell for relative to their NOI? Market cap rate data sources: commercial brokers (CBRE, JLL, Marcus & Millichap), NCREIF (institutional-grade data), CoStar, and local appraisers. The market cap rate is not what you want to earn — it is what the market is pricing similar assets at. Buying below market cap rate = overpaying; buying above market cap rate = potential value find. The Implied Value formula answers: 'What would a buyer using market cap rates pay for this property's income stream?'

\text{Value}

= The market-implied value of the property based on its NOI and prevailing market cap rates. Example: $42,000 NOI at a 6% market cap rate implies a value of $42,000/0.06 = $700,000. If the asking price is $500,000 (an 8.4% cap rate), the property may be underpriced relative to market. This formula is how commercial real estate appraisers determine value via the Income Approach — one of the three standard real estate appraisal methods (alongside Sales Comparison and Cost Approach).

Effective Gross Income & Gross Rent Multiplier

\text{EGI} = \text{GRI} \times (1 - V) \quad;\quad \text{GRM} = \frac{\text{Price}}{\text{GRI}}

V

= Vacancy rate as a decimal (e.g., 5% = 0.05). Market vacancy rates by asset type: Class A multifamily in major metro: 3–5%; Class B suburban multifamily: 5–8%; Single-family rentals: 5–7%; Class A office: 10–15% (post-2020 remote work shift); Retail strip center: 8–15%; Industrial/warehouse: 2–5% (historically low). Higher vacancy rates reflect harder-to-fill assets, oversupplied markets, or lower asset quality. A vacancy rate above the market average for a given asset class signals a property-specific problem (poor condition, below-market management, unattractive location) — this requires investigation before underwriting.

\text{GRM}

= Gross Rent Multiplier — Price / Annual Gross Rent (before vacancy and expenses). GRM is a quick back-of-napkin screening metric for residential income properties. GRM of 5 means the purchase price is 5× total annual gross rent. Ranges: GRM 4–7 = strong value (less expensive markets); GRM 8–12 = typical suburban multifamily; GRM 15–20+ = expensive gateway markets (NYC, LA, SF). GRM is much less reliable than cap rate because it ignores vacancy rate and all expenses. Two identical GRM properties can have dramatically different cap rates if expense ratios differ. GRM is useful only for quick initial screening — always verify with a full NOI analysis before making an offer.

Laws & Principles

The Inverse Relationship: Higher Price = Lower Cap Rate = Lower Implied Risk: A property with $50,000 NOI purchased for $625,000 has an 8.0% cap rate. If compression drives prices to $833,000 (same income, different market sentiment), the cap rate falls to 6.0%. Cap rate and value move inversely: rising demand compresses cap rates; falling demand expands them. This relationship governs real estate market cycles: in a rising market (2010–2021), institutional capital chasing yield drove cap rate compression from 7–8% to 4–5% in major markets. In a rising interest rate environment (2022–2024), rising risk-free rates (10-year Treasury) forced cap rates to expand as investors required greater spreads over bonds. The spread between cap rate and 10-year Treasury yield (historically 150–250 basis points) is a key valuation gauge for real estate investors monitoring entry and exit timing.
What Goes Into NOI — And What Never Should: NOI must include: gross rent minus vacancy; property taxes; insurance; management fees (8–12% of EGI typical); routine maintenance (1–2% of property value annually); utilities if landlord-paid; landscaping, pest control, common area maintenance. NOI must NEVER include: mortgage payments or interest (debt service); income taxes; depreciation; capital expenditures (roof replacement, HVAC, appliance replacement); owner's equity distributions. Including debt service in the expense calculation is the most common valuation error made by inexperienced investors — it produces an artificially low NOI, a falsely low cap rate, and an overvalued (overpaid) acquisition. Always build your own NOI model from lease rolls and actual trailing-twelve-month expenses, not the seller's proforma.
Cap Rate vs. Cash-on-Cash Return — Two Different Questions: Cap rate answers: 'What does the ASSET earn unlevered?' Cash-on-cash return (CoC) answers: 'What do I earn on MY EQUITY after debt service?' Example: 7% cap rate property, 70% LTV loan at 6.5% interest, 30-year amortization. Annual debt service on a $700K asset with $490K loan: ~$37,000/year. NOI = $49,000. After debt service: $49,000 − $37,000 = $12,000 cash flow. Cash invested (30% equity): $210,000. CoC return: $12,000 / $210,000 = 5.7%. Lower than the cap rate because leverage at 6.5% interest on a 7% cap rate asset provides minimal positive leverage. Positive leverage requires borrowing at rates below the cap rate. When interest rates exceed cap rates (negative leverage): using debt reduces CoC below the going-in cap rate — an increasingly common situation in 2022–2024 when rates exceeded many major market cap rates.
CapEx Reserve Is Missing from Seller Proformas — Always Add It: Every investment property requires periodic capital expenditure (CapEx) beyond routine maintenance: roof replacement ($8–20/SF), HVAC ($3,000–8,000/unit), electrical panels ($1,500–3,000), plumbing, parking lot, exterior paint, appliances. Sellers' proformas systematically exclude CapEx because it makes the NOI look higher. Professional underwriting always includes an annual CapEx reserve even if the property is newly renovated. Rule of thumb: $500–800/unit/year for newer properties; $1,000–1,500/unit/year for 30+ year properties; 10–15% of NOI for commercial properties. Including CapEx reserve reduces stated NOI, which reduces the calculated cap rate to a more conservative 'stabilized' figure. A seller quoting a 7.5% cap rate before CapEx reserve may only be a 6.2% cap rate deal after realistic reserves — a significant underwriting difference at scale.

Step-by-Step Example Walkthrough

" An investor evaluates a 6-unit apartment building asking $620,000. Gross annual rent: $72,000. Vacancy: 5%. Operating expenses: $18,500/year. Market cap rate for comparable B-class multifamily in the submarket: 6.5%. Analyze the deal. "

1. EGI: $72,000 × (1 − 0.05) = $72,000 × 0.95 = $68,400.
2. NOI: $68,400 − $18,500 = $49,900.
3. Going-in Cap Rate: $49,900 / $620,000 = 8.05%.
4. GRM: $620,000 / $72,000 = 8.6× gross rent.
5. Market-implied value at 6.5% cap: $49,900 / 0.065 = $767,692.
6. Implied upside: $767,692 − $620,000 = $147,692 (24% below implied market value).
7. CapEx check: 30-year building, add $1,000/unit/year × 6 = $6,000 reserve. Adjusted NOI: $49,900 − $6,000 = $43,900. Adjusted cap rate: $43,900 / $620,000 = 7.08%.

Final Result: Going-in cap rate: 8.05% (above market 6.5% = trading at a discount). Adjusted (conservative) cap rate including CapEx reserve: 7.08%. Market-implied value at 6.5% cap: $768K — suggesting meaningful value upside if the property is stabilized and market cap rates compress. The 24% discount to implied value is the investment thesis. Confirm by independently verifying all rent rolls and trailing-12-month expenses before offer.

Quick Answer: What is a good cap rate for rental property?

Cap Rate = NOI ÷ Purchase Price × 100%. What’s “good” depends entirely on asset type and market: Class A multifamily in major cities: 3.5–5% (low risk, high price, compressed yield); suburban B-class multifamily: 5.5–7.5%; value-add or tertiary markets: 7.5–10%+. Cap rate is a risk thermometer — higher rate = higher implicit risk or lower asset quality. The most important cap rate is not the number itself but the spread over local market cap rates — buying below market rates means paying a premium; buying above means finding a discount or taking on more risk.

Cap Rate Benchmarks by Asset Class & Market Tier (2024)

Cap rates vary substantially by asset type, market tier, and interest rate environment. Use these as directional benchmarks — always verify local data with your commercial broker or recent comparable sales (comps) in the specific submarket.

Asset Class	Gateway Markets	Secondary Markets	Tertiary/Value-Add
Class A Multifamily	3.5–4.5%	4.5–5.5%	5.5–7.0%
Class B/C Multifamily	4.5–5.5%	5.5–7.5%	7.0–10%+
Industrial / Warehouse	4.0–5.5%	5.5–7.0%	7.0–8.5%
Retail (NNN Anchored)	5.0–6.5%	6.0–7.5%	7.5–9.0%
Office (Class A)	5.5–7.5%	7.0–9.0%	9.0–12%+
Self-Storage	5.0–6.5%	6.0–7.5%	7.5–9.0%
Ranges reflect approximate 2024 US market conditions. Office cap rates expanded significantly post-2020 due to remote work impact on demand. Industrial compressed significantly 2020–2023 due to e-commerce demand. Cap rates are dynamic — always verify with current local comparable sales and commercial broker data before underwriting.

Pro Tips & Common Cap Rate Mistakes

Do This

✓Always build your own NOI model from actual rent rolls and trailing-12-month bank statements — never trust the seller’s proforma as the basis for your cap rate calculation. Seller proformas routinely: project above-market rent assumptions (“market rate rents” for below-market tenants who haven’t been renewed); exclude vacancy or use artificially low rates; omit management fees (especially in self-managed properties where the seller’s time is free but a new buyer’s management cost is 8–12% of EGI); exclude CapEx reserves; include one-time income (move-in fees, insurance proceeds) in operating income. The difference between seller proforma cap rate and buyers’ stabilized cap rate is often 100–200 basis points. Due diligence means rebuilding NOI from source documents: signed leases, actual trailing 12-month expense statements, tax returns, utility bills, and insurance certificates. Underwrite to your income model, not the seller’s.
✓Use the implied value formula (NOI ÷ Market Cap Rate) to identify discount or premium to market value — this is how commercial brokers and appraisers justify (or dispute) asking prices. If local market cap rates for comparable B-class multifamily are 6.5% and your target property has $49,900 NOI: implied market value = $49,900 / 0.065 = $767,692. If the asking price is $620,000 (an 8.05% cap rate), the property is trading at a 19% discount to implied market value — your investment thesis. If the asking price is $900,000 (a 5.5% cap rate), you’re paying a 17% premium to market cap rates — justifiable only if you believe NOI will grow significantly through rent bumps, reduced vacancy, or expense reduction. Understanding the spread between your going-in cap rate and market cap rates tells you exactly how much you are paying for (or being compensated for) investment risk and NOI growth potential.

Avoid This

✗Don’t include mortgage payments in the cap rate expense calculation — this destroys the financing-agnostic comparison that makes cap rate useful. Cap rate measures what the ASSET earns, not what the INVESTOR earns after borrowing. Including debt service in your expense calculation means your “cap rate” will be different for the same property at different down payments — making it useless for comparing deals. Example: a $500K property with $40K NOI has a cap rate of 8.0% whether you pay all cash or use 80% LTV. But if you include mortgage payments ($27,000/year at 7%), your “adjusted” figure becomes ($40K−$27K)/($500K) = 2.6% — which is actually your return on equity at that leverage level, not the cap rate. Use cap rate for property comparison; use cash-on-cash return and IRR for equity return analysis.
✗Don’t chase the highest cap rate without understanding why it’s high — elevated cap rates almost always signal elevated risk, not elevated opportunity. A strip center at 11% cap rate in a tertiary market is not simply a better investment than a 5% cap rate apartment in Austin. The 11% cap rate reflects: higher vacancy risk, weaker tenant credit, smaller buyer pool (harder to exit), single-tenant concentration risk, and deferred maintenance. All of these translate to income volatility and potentially total investment loss if the anchor tenant leaves. The 5% cap rate asset has compressed yield because many buyers compete for it — deep institutional demand, diverse tenant base, strong rental demand, and high liquidity. Chasing yield in real estate (as in any asset class) without understanding the underlying risk profile is one of the top reasons inexperienced investors suffer capital losses. Cap rate is the market’s embedded risk assessment.

Frequently Asked Questions

What is the difference between cap rate and cash-on-cash return?

Cap rate = NOI ÷ Total Property Value (before financing). It is a property-level, financing-agnostic metric. Cash-on-cash return = Annual Pre-Tax Cash Flow after debt service ÷ Total Equity Invested. It is an investor-level metric that reflects the effects of leverage, interest rate, and loan terms. Example: $500K property, $40K NOI, 75% LTV at 7% interest. Cap rate = $40K / $500K = 8.0%. Annual debt service on $375K loan ≈ $30,000. Pre-tax cash flow: $40K − $30K = $10K. Equity: $125K. CoC return = $10K / $125K = 8.0%. In this example they happen to be similar. If interest rates were 9%: debt service rises, CoC falls below the cap rate (negative leverage). When loan rates < cap rate: leverage amplifies CoC above the cap rate (positive leverage). Use cap rate to evaluate the asset. Use CoC and IRR to evaluate the investment deal.

Can I use cap rate to value a single-family rental property?

Yes, but with caveats. Single-family rentals (SFRs) are primarily valued by comparable sales (comps), not by income. The local buyer pool for SFRs includes owner-occupants who pay based on comparable sales prices, not cap rates. This means SFRs often trade at implied cap rates of 3–5% in desirable markets — rates that no pure investor would accept — because owner-occupants outbid investors. Cap rate is most useful for SFRs in: screening (is this rental price/purchase price ratio viable?), comparing multiple rental properties in the same market, and underwriting in investor-heavy tertiary markets where comps are sparse. GRM (Gross Rent Multiplier) is more commonly used for quick SFR screening. The Salary test: if the rent does not cover PITI (principal, interest, taxes, insurance) + vacancy + management + maintenance at a given price, the cap rate analysis will show why: the market price exceeds income supportable value. This is the fundamental tension in expensive residential real estate markets.

How do I calculate NOI if I only have the gross rent figure?

Use an expense ratio estimate when you don’t have detailed expense data. Common expense ratios for quick NOI estimation: Residential multifamily: 35–50% of EGI (35% for newer, well-maintained; 50% for older with high utility costs or deferred maintenance). Single-family rental: 40–50% of EGI (higher expense ratio because vacancy impact is total, not partial). NNN commercial (tenant pays OpEx): 10–20% of EGI (landlord pays only insurance and reserves). Gross lease office/retail: 40–55% of EGI. Example with 45% expense ratio: $72,000 GRI × 95% occupancy = $68,400 EGI. $68,400 × (1 − 0.45 expense ratio) = $68,400 × 0.55 = $37,620 estimated NOI. Using this quick NOI: $37,620 / $620,000 = 6.1% estimated cap rate. Always replace estimated ratios with actual trailing-12-month verified expenses as soon as possible in the due diligence process — expense ratios can vary by 15–20 percentage points from the estimate in poorly managed or capital-deficient properties.

Why did cap rates increase in 2022–2024 as interest rates rose?

Cap rates are tightly correlated with the 10-year Treasury yield (the risk-free rate). Historically, real estate cap rates trade at a 150–250 basis point spread over the 10-year Treasury to compensate for illiquidity, management burden, and asset risk. When the Fed raised rates from 0.25% (2021) to 5.25% (2023): the 10-year Treasury rose from ~1.5% to ~4.5%. If investors require 200 bps spread: required cap rates rose from ~3.5% (1.5% + 2%) to ~6.5% (4.5% + 2%). Since NOI does not change immediately when rates rise: the only way cap rates can rise is for property VALUES to fall. A property with $50,000 NOI that traded at a 4.0% cap rate ($1.25M price) must now trade at 6.5% cap rate ($769K price) — a 38% value decline. This is the mathematical mechanism by which rising interest rates cause commercial real estate value declines, and why 2022–2024 saw significant stress in CRE markets (especially office). Properties with near-term debt maturities requiring refinancing at higher rates faced overlapping valuation pressure from both rate-driven cap rate expansion and higher carrying costs.

Cap Rate Calculator

Cap Rate Calculator