Rental analysis
Cap Rate Calculator
The capitalization rate is a property's annual net operating income as a percentage of its price — the standard first-pass measure of what a rental earns before financing. Enter your numbers; every step is shown below.
Informational only, not professional advice. This calculator computes a standard formula from the numbers you enter — it doesn't know your market, your financing, or your tax situation.
Methodology
The capitalization rate is defined as net operating income divided by the property's price (Investopedia: Capitalization Rate). This calculator builds NOI from your inputs in three steps, then divides:
- Gross annual income = monthly rent × 12
- Effective gross income = gross income − vacancy loss (gross × vacancy rate)
- Net operating income = effective gross income − annual operating expenses
- Cap rate = NOI ÷ purchase price
NOI excludes debt service and capital expenditures by definition (Investopedia: Net Operating Income), which is what makes cap rate comparable across buyers with different financing.
Assumptions and limitations
- The vacancy rate is your assumption, not a fact — actual vacancy varies by market and property. 5–8% is a common planning range for long-term rentals.
- Using purchase price gives the cap rate at acquisition. Appraisers compute it against current market value, so the two diverge as values move.
- The result is only as good as your expense estimate. Underestimating operating expenses is the most common way this number flatters a deal.
- Cap rate says nothing about financing, appreciation, or taxes — it's one screening metric, not a full deal analysis.
Last reviewed: July 2026
Frequently asked questions
What is a good cap rate for a rental property?
There is no universal "good" cap rate — it varies by market, property type, and risk. Stabilized properties in expensive, low-risk markets often trade at 4–6%, while higher-risk or smaller markets can trade at 8–10% or more. A higher cap rate means more income per dollar of price, but usually reflects higher perceived risk. Compare a property's cap rate against recent sales of similar properties in the same market, not against a national benchmark.
Does cap rate include mortgage payments?
No. Cap rate is calculated from net operating income, which by definition excludes debt service (mortgage principal and interest). That makes cap rate a financing-independent measure — two buyers with different loans see the same cap rate on the same property. To measure return on the cash you actually invest after financing, use cash-on-cash return instead.
What counts as operating expenses in the cap rate formula?
Operating expenses include property taxes, insurance, property management fees, repairs and maintenance, utilities you pay as the owner, HOA dues, and similar recurring costs of running the property. They exclude mortgage payments, capital expenditures (like a roof replacement), depreciation, and income taxes. A common rough planning figure is 35–45% of gross rent for long-term rentals, but your actual line items should replace any rule of thumb.
What is the difference between cap rate and cash-on-cash return?
Cap rate measures the property's unlevered yield: NOI divided by purchase price, ignoring financing. Cash-on-cash return measures your levered yield: annual pre-tax cash flow after mortgage payments, divided by the cash you actually invested (down payment plus closing costs). Cap rate compares properties; cash-on-cash compares what a specific deal returns on your money given your specific loan.
Related tools
Itemize income and operating expenses line by line to get a property's net operating income — the number cap rates and appraisals are built on.
Open tool →Cash-on-Cash Return CalculatorAnnual pre-tax cash flow after the mortgage, as a percentage of the cash you actually invested — cap rate's levered counterpart.
Open tool →ARV CalculatorAfter-repair value from comparable sales — each comp's price per square foot, averaged and applied to your square footage, with every step shown.
Open tool →