Cap Rate Calculator
Calculate the capitalization rate of a rental property from its net operating income and purchase price. Enter your numbers below to instantly see effective gross income, operating expenses, NOI, cap rate, and the purchase price a target cap rate implies.
How to Calculate Cap Rate
The capitalization rate, or cap rate, measures a rental property's unleveraged annual return: its net operating income divided by its purchase price. Because it deliberately excludes financing, cap rate lets you compare deals of very different sizes and mortgage structures on equal footing. For a return figure that does account for your specific loan and down payment, the cash-on-cash return calculator is the better tool.
Cap Rate Formula and Net Operating Income
Net operating income (NOI) is the property's effective gross income minus its operating expenses, before any mortgage payment is subtracted. Effective gross income accounts for vacancy: it is the gross rent you'd collect if the unit were occupied every month of the year, reduced by the share of the year it sits vacant. This calculator charges maintenance as a percentage of gross rent (since upkeep costs don't shrink just because a unit is vacant) and property management as a percentage of effective, collected rent (since a manager is typically paid out of what actually comes in) — the same convention used throughout this site's other rental calculators, including the rental property ROI calculator.
NOI = Effective Gross Income - Operating Expenses
Operating Expenses
Operating expenses are every recurring cost of owning and running the property that isn't financing: property tax, insurance, HOA dues (annualized from a monthly figure), maintenance, and management. They do not include your mortgage principal and interest, capital expenditures, or depreciation — those live outside NOI by design, which is what makes cap rate comparable across properties financed in completely different ways.
Price Implied by a Target Cap Rate
Rearranging the cap rate formula around a target rate answers a different, equally useful question: given this property's NOI, what purchase price would you need to pay to hit the cap rate you're underwriting to? If a seller's asking price is well above this implied figure, the deal is priced below your target cap rate at that NOI, and either the price needs to come down or the NOI needs to go up for the numbers to work.
When the Implied Price Shows as a Dash
A negative cap rate is a real, meaningful result: it means operating expenses exceed effective income at the entered purchase price, and this calculator displays it as-is. But "Price at Target Cap Rate" shows a dash rather than a number in two situations. A 0% target is never hit at any finite price, since cap rate on positive NOI only shrinks toward 0% as price rises without bound; and whenever NOI is zero or negative, cap rate carries that same non-positive sign at every purchase price, so a positive target can never be reached at all, no matter how low the price. This calculator shows a dash in both cases instead of a $0 or a negative dollar figure that would misstate what's actually going on.
Cap Rate and Loan Sizing
Cap rate measures the deal on an all-cash basis, but a lender financing the purchase cares about a different question: does this same NOI cover the loan payment by a comfortable margin? That coverage ratio, and the maximum loan a target coverage margin allows, is what the DSCR calculator works out from the same NOI this page computes.
Worked Example
Consider a $300,000 rental collecting $30,000 in gross annual rent, with a 5% vacancy allowance, $3,000/year in property tax, $1,500/year in insurance, no HOA, 10% of gross rent set aside for maintenance, and 10% of effective rent for property management. The investor is underwriting to a 6% target cap rate.
Inputs Used
- Purchase Price: $300,000
- Gross Annual Rent: $30,000
- Vacancy Rate: 5%
- Property Tax: $3,000/yr
- Insurance: $1,500/yr
- HOA: $0/mo
- Maintenance: 10% of gross rent
- Property Management: 10% of effective rent
- Target Cap Rate: 6%
Computed Result
- Effective Gross Income: $28,500
- Total Operating Expenses: $10,350
- Net Operating Income: $18,150
- Cap Rate: 6.05%
- Price at Target Cap Rate: $302,500
How to Read This Result
A cap rate of 4-10% is a common industry range, with the middle of that range often cited for stabilized rentals, though this is never a guarantee and varies by market. This example comes out to 6.05%, close to its 6% target, and the implied price at that target ($302,500) sits just above the actual purchase price of $300,000 — meaning this deal slightly beats the investor's target cap rate at the stated NOI. Change any input above to see how sensitive the cap rate is to rent, vacancy, or expenses.
Cap Rate Calculator FAQs
What is a good cap rate?
A cap rate of 4-10% is a common industry range, with 5-8% often cited as a reasonable middle ground for stabilized rentals in many markets. Lower cap rates typically reflect lower-risk, higher-priced markets, while higher cap rates often signal more risk or a property needing work. These are common industry ranges, not guarantees, and the right number depends heavily on your market and risk tolerance.
Does cap rate account for my mortgage payment?
No. Cap rate deliberately ignores financing so that properties with different loan structures can be compared on equal footing. If you want a return figure that includes your specific loan, use a cash-on-cash return calculation instead.
Why is maintenance calculated on gross rent but management on effective rent?
This calculator follows the common convention that maintenance costs (repairs, upkeep) scale with the unit's full rental value regardless of vacancy, while a property manager's fee is typically a percentage of the rent actually collected, since that is what they are being paid out of.
What does the "price at target cap rate" tell me?
It backs out the purchase price at which this property's NOI would produce exactly the cap rate you entered as your target. If the implied price is below the actual purchase price, the deal is priced below your target cap rate at the price you entered.
Why does "Price at Target Cap Rate" sometimes show a dash instead of a number?
A dash means there is no finite, meaningful purchase price to show. It appears in two situations: when your target cap rate is 0%, since cap rate on positive NOI only shrinks toward 0% as the price rises without bound and never actually reaches it at any finite price; and when NOI is zero or negative, since cap rate then carries that same non-positive sign at every purchase price, so a positive target can never be reached at all. Either way, a dash is more honest than a misleading dollar figure.