Enter values and click Calculate to see results.
| NOI Δ \\ Price Δ | -20% | -10% | +0% | +10% | +20% |
|---|---|---|---|---|---|
| -10% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| -5% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| +0% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| +5% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
| +10% | 0.00% | 0.00% | 0.00% | 0.00% | 0.00% |
- NOI excludes debt service, income taxes, and capital expenditures unless you include them inside Operating Expenses.
- Vacancy rate applies to Gross Scheduled Income. Other Income is added after vacancy.
- Target Cap implies a price using your current NOI. Adjust inputs to reflect stabilized operations if needed.
- All figures are annual. Use value instead of price for hold analysis.
The capitalization rate (often shortened to cap rate) is a quick, finance‑oriented way to value income‑producing real estate and compare properties on a like‑for‑like basis. A Cap Rate Calculator automates the math by combining a property’s net operating income (NOI) with its purchase price or market value. Because the equation is simple and standardized, it helps investors screen deals, benchmark acquisitions, and sanity‑check broker pro formas.
What is Cap Rate?
Cap rate is the ratio of a property’s normalized annual NOI to its price. It answers the question: “If I bought this asset with cash today and operated it as modeled, what unlevered yield would I earn before capital costs and taxes?” While cap rate is not a substitute for a full discounted cash flow (DCF) model, it is an efficient first pass.
Where NOI is annual rental and other operating income minus ordinary operating expenses (management, utilities, maintenance, property taxes, insurance), but before debt service, capital expenditures, depreciation, and income taxes.
Inputs a Cap Rate Calculator Needs
| Input | What it Represents | Tips |
|---|---|---|
| Gross Scheduled Rent | Annual rent assuming stabilized occupancy. | Normalize free rent and concessions; use market rent if below‑market leases roll soon. |
| Vacancy & Credit Loss | Allowance for downtime and non‑payment. | Use market vacancy; avoid overly optimistic trailing figures. |
| Other Income | Parking, storage, pet fees, reimbursements. | Confirm sustainability and seasonality. |
| Operating Expenses | Taxes, insurance, repairs, utilities, admin, management. | Benchmark per‑unit or per‑sf to spot anomalies. |
| Purchase Price / Value | Contract price or market value. | Exclude acquisition fees; use price before financing. |
Step‑by‑Step Example
Suppose you are evaluating a 12‑unit multifamily property:
| Line Item | Amount (USD) | Notes |
|---|---|---|
| Gross Scheduled Rent | $216,000 | 12 units × $1,500 × 12 months |
| Less: Vacancy (5%) | −$10,800 | Market vacancy assumption |
| Other Income | $6,000 | Parking and laundry |
| Effective Gross Income (EGI) | $211,200 | GSR − Vacancy + Other |
| Operating Expenses | −$98,000 | Taxes, insurance, R&M, management |
| Net Operating Income (NOI) | $113,200 | EGI − OpEx |
| Purchase Price | $1,850,000 | Contract price |
| Cap Rate | 6.12% | NOI ÷ Price |
Interpretation: at the stated price and normalized operations, this asset yields an unlevered 6.12% before any mortgage payments or capital reserves. Your required return, risk appetite, and expectations for rent growth should guide whether 6.12% is attractive.
Sensitivity: What Moves Cap Rate?
Cap rate is sensitive to both NOI and price. The table below shows how small changes can materially shift the headline number. This helps you pressure‑test underwriting and negotiate pricing.
| Scenario | NOI | Price | Resulting Cap Rate |
|---|---|---|---|
| Base Case | $113,200 | $1,850,000 | 6.12% |
| Rent Upside (+3% NOI) | $116,596 | $1,850,000 | 6.30% |
| Expense Creep (−3% NOI) | $109,804 | $1,850,000 | 5.93% |
| Discounted Price (−$75k) | $113,200 | $1,775,000 | 6.38% |
| Higher Price (+$75k) | $113,200 | $1,925,000 | 5.88% |
Using a Cap Rate Calculator Effectively
- Normalize inputs. Replace unusual one‑off costs or temporary incentives with stabilized figures.
- Separate operating vs. capital. Keep capital expenditures out of NOI to avoid distorting comparability.
- Benchmark. Compare the calculated cap rate to recent trades for similar assets and locations.
- Run sensitivities. Test moderate changes in rent, vacancy, and expenses to understand downside.
- Use with other metrics. Pair cap rate with DSCR, cash‑on‑cash, and IRR for a fuller picture.
Cap Rate vs. Other Metrics
| Metric | What It Captures | When to Use |
|---|---|---|
| Cap Rate | Unlevered yield at purchase based on stabilized NOI. | Quick screening and cross‑property comparisons. |
| Cash‑on‑Cash | Levered yield on invested equity after debt service. | Assessing year‑one equity returns given financing. |
| IRR | Time‑weighted return over the hold period. | Projects with uneven cash flows or value‑add plans. |
| Price per Unit / per SF | Size‑based valuation multiples. | Benchmarking relative to local comps. |
Limitations and Common Pitfalls
- Static snapshot: Cap rate ignores future rent growth, capital plans, and exit timing.
- NOI quality: Overstated other income or understated expenses will inflate cap rate.
- Non‑stabilized assets: For heavy‑value‑add properties, cap rate can be misleading.
- Lease structure: NNN vs. gross leases shift expense risk between landlord and tenants.
- Market differences: Location and asset class drive typical ranges; do not compare unlike assets directly.
FAQs
Is a higher cap rate always better?
Not necessarily. Higher cap rates can indicate elevated risk, weaker locations, shorter leases, or greater capital needs. Align selection with your risk‑adjusted return targets.
Can cap rate be negative?
Yes—if NOI is negative (for example, due to high vacancy or extraordinary expenses). Such cases signal a turn‑around situation rather than a stabilized investment.
What cap rate is considered “good”?
“Good” depends on property type, market, and interest‑rate environment. Use recent comparable sales and your underwriting hurdles to define an acceptable band.
Should I use in‑place or pro forma NOI?
For conservative screening, use stabilized pro forma that reflects realistic vacancy and expenses. Clearly label which basis you are using and why.
How does financing affect cap rate?
Cap rate is unlevered and independent of financing. Debt changes cash‑on‑cash returns and DSCR, not the cap rate itself.