Cap Rate Calculator for Rental Property
Work out a property's capitalization rate from its rent and operating expenses. Cap rate measures the property on its own, before any mortgage, so you can compare deals financed in completely different ways.
Inputs
Property value, rent and yearly operating costs
Property & income
Annual operating expenses
Mortgage principal and interest are deliberately excluded. Cap rate is a property metric, not a financing metric.
A middle-of-the-road cap rate, common for solid rentals in stable markets.
Net operating income
$18,271
per year, before loan
Effective gross income
$27,360
rent after vacancy
Operating expenses
$9,089
per year
Monthly NOI
$1,523
before loan payment
How this number was built
Gross annual rent $28,800, minus a 5% vacancy allowance of $1,440, gives effective gross income of $27,360.
Operating expenses total $9,089, including $2,189 of management at 8% of collected rent.
Net operating income is $18,271. Divided by a property value of $300,000, that is a cap rate of 6.09%.
How the cap rate calculator works
This cap rate calculator turns a rent figure and a list of operating costs into the capitalization rate investors and appraisers use to compare buildings. It applies a vacancy allowance to gross rent, subtracts your yearly operating expenses to reach net operating income, and divides that by the property value. Because financing is excluded, the result describes the property itself rather than the loan you happen to be using.
The formula
- Effective gross income = annual rent minus the vacancy allowance
- Operating expenses = taxes, insurance, maintenance, management, HOA and other yearly costs
- Net operating income (NOI) = effective gross income minus operating expenses
- Cap rate = NOI divided by property value, expressed as a percent
Worked example
A 300,000 dollar rental collects 2,400 dollars a month, or 28,800 dollars a year. A 5 percent vacancy allowance takes off 1,440 dollars, leaving 27,360 dollars of effective gross income. Taxes of 3,600, insurance of 1,500, maintenance of 1,800, and management at 8 percent of collected rent add up to roughly 9,089 dollars of operating expenses. Net operating income lands near 18,271 dollars, which against the 300,000 dollar value is a cap rate of about 6.1 percent.
Why cap rate leaves the mortgage out
Two buyers can look at the same building and finance it completely differently, one paying cash and one borrowing heavily. If the mortgage were included, they would compute different returns for an identical property, which makes comparison impossible. Holding financing out is what lets cap rate work as a market yardstick. Once you want to know what your own money earns after the loan payment, switch to cash-on-cash return, which is the financed counterpart to this number, or read the full cap rate vs cash-on-cash comparison. For a complete picture including financing, DSCR and cash flow, use the rental property calculator.
Frequently asked questions
Does cap rate include the mortgage?
No, and this is the most common mistake. Cap rate uses net operating income, which is income after operating expenses but before any loan payment. Financing is deliberately excluded so two buyers looking at the same building get the same cap rate even if one pays cash and the other borrows eighty percent. That is what makes it a property metric rather than a financing metric.
How do you calculate cap rate?
Divide net operating income by the property value, then multiply by one hundred. Net operating income is annual rent, reduced by a vacancy allowance, minus operating expenses such as taxes, insurance, maintenance, management and HOA. A property worth 300,000 dollars producing 21,000 dollars of net operating income has a 7 percent cap rate.
What is net operating income, and how is it different from cash flow?
Net operating income is what the property earns after operating costs but before debt. Cash flow is what is left after the mortgage is also paid. A property can have healthy net operating income and still produce thin cash flow if the loan is expensive, which is why the two numbers are tracked separately and why cap rate uses the first one.
Does a higher cap rate mean a better deal?
Not on its own. A higher cap rate means more income relative to price, but it usually comes with something else: an older building, a softer location, higher turnover, or costs that have not been fully counted. A lower cap rate often reflects a market where buyers accept less current income because they expect appreciation. Read the number against comparable properties in the same market, not against a national benchmark.
Which expenses change the cap rate most?
Property taxes and management are the two that most often get understated. Taxes can reset after a sale, so using the seller's current bill can overstate net operating income badly. Management is frequently left out by owners who plan to self-manage, but the work still has a market cost and any future buyer will price it in. Vacancy is the third, because a property is rarely occupied every day of the year.
Related calculators
- Rental Property Calculator: full cash flow, DSCR and returns
- Cash-on-Cash Calculator: the financed counterpart to cap rate
- Rent Estimate Calculator: what the property should rent for
- BRRRR Calculator: buy, rehab, rent, refinance, repeat
- Appreciation Calculator: project long-term equity
- Cap Rate vs Cash-on-Cash: which metric answers which question
Want the rent and value estimated for you? Resideline analyzes any US address with real comparable sales and rent estimates, and its public accuracy scoreboard shows a 3.34 percent median error. Plans start free.
Watch: how to calculate cap rate
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