How this cap rate calculator works
Cap rate is the yield a property pays on its price before any loan. It is the number appraisers, brokers and lenders use to compare income properties, and the number that converts a rent roll into a value.
The calculator builds net operating income the way an appraiser would. Rent and other income, minus a vacancy allowance, gives collected income. Taxes, insurance, HOA, maintenance, capital reserves and management come off next. What remains is NOI, and NOI divided by price is the cap rate.
It also works backwards. Enter a target cap rate, whether it is your hurdle or the rate comparable sales are trading at, and it shows the value that NOI supports and the rent needed to justify the asking price.
The cap rate formula
Cap rate = net operating income / purchase price
Using the default property above: rent of $2,500 is $30,000 a year. After 5% vacancy, collected income is $28,500. Taxes of $3,600, insurance of $1,500 and 18% of collected income for maintenance, reserves and management bring operating expenses to $10,230, an expense ratio of 36%.
Net operating income is $18,270. Divided by the $300,000 price, the cap rate is 6.09%. At a 7% target the same NOI is worth $261,000, so the property is priced about $39,000 above a 7% buyer's number. To justify $300,000 at 7%, rent would need to be $2,792.
Nothing about a loan appears in that calculation. Cap rate is a property measure, not a financing measure. The formula guide works through every line with more examples.
What is a good cap rate?
A good cap rate is one at or above what comparable properties in the same market sell for. Nationally, most residential rentals trade between 4% and 8%. Lower means buyers are paying for safety and growth. Higher means they are demanding more income for more risk.
| Cap rate | Read as | Where you tend to see it |
|---|---|---|
| Under 4% | Low | Coastal California, New York, Seattle, Boston. Appreciation markets. |
| 4 to 6% | Moderate | Most large metros. Newer single-family rentals, good school districts. |
| 6 to 8% | Solid | Mid-priced and secondary markets. Small multifamily in growing cities. |
| 8 to 10% | High | Low-cost Midwest and South, older stock, C-class neighborhoods. |
| Over 10% | Very high | Very cheap markets, distressed assets, or expenses that are understated. |
Every cap rate has its own page with worked numbers. See what a 6% cap rate means or the guide to what counts as a good cap rate.
Cap rate and value move together
Rearrange the formula and value equals NOI divided by cap rate. That makes cap rate a pricing tool. At a 6% cap rate, every $1,000 of annual NOI is worth about $16,667. At 5% it is worth $20,000. At 8% it is $12,500.
Two things follow. A $50 a month rent increase or a $600 a year insurance saving is worth about $9,500 of value at a 6% cap rate, far more than the cash itself. And when market cap rates fall by a point, every property in that market gets more valuable without earning another dollar. The valuation guide covers how to use this when buying and selling.
What cap rate leaves out
Financing. Two buyers can pay the same price at the same cap rate and earn very different returns on their own cash depending on their loans. Cap rate vs cash on cash return explains the split.
Growth. A 4% cap rate in a market with 5% rent growth can outperform an 8% cap rate in a flat one over ten years. Cap rate is a snapshot of year one.
Capital needs. A property that needs a roof next year and one that had a roof last year can show the same cap rate. Reserves in the expense line help, but only an inspection tells you which one you are buying.