Cap Rate Calculator

The capitalization rate, or cap rate, is one of the most widely used metrics in real estate investing. It measures a property's income-generating potential as a percentage of its value, assuming an all-cash purchase with no financing. Cap rate gives investors a quick way to compare investment properties on an apples-to-apples basis, regardless of how they plan to finance the deal.

Cap rate is calculated by dividing a property's Net Operating Income (NOI) by its current market value or purchase price. NOI is the annual income the property generates after all operating expenses — property taxes, insurance, maintenance, property management fees, and other costs — but before mortgage payments. Because cap rate excludes financing, it reflects the property itself, not the investor's capital structure.

A higher cap rate generally indicates a higher potential return, but also higher risk. Properties in high-demand, low-risk markets like major coastal cities tend to trade at lower cap rates (3–5%) because buyers accept lower yields in exchange for stability and appreciation potential. Properties in secondary markets or with higher vacancy risk typically trade at higher cap rates (6–9%+) to compensate investors for the additional risk.

Cap rate is also used as a valuation tool. If you know the market cap rate for a property type and location, you can work backward to estimate what a property should be worth based on its income: Property Value = NOI ÷ Cap Rate. This income approach to valuation is how commercial real estate appraisers and institutional investors price assets.

For a complete investment analysis that includes financing, cash flow, and return on invested capital, use the Rental Property Deal Analyzer alongside this cap rate calculator.