Cap Rate Calculator

About the Cap Rate Calculator

The capitalization rate, or cap rate, is one of the most widely used metrics in real estate investing. It measures the rate of return on a property based on its net operating income (NOI) relative to its current market value or purchase price. By distilling a property's income potential into a single percentage, the cap rate provides a quick way to compare investment opportunities across different markets and property types.

This calculator computes the cap rate from your property's NOI and value, and also back-solves the implied property value when you input a target cap rate. This dual functionality helps both buyers evaluating deals and sellers pricing their properties. A higher cap rate generally indicates higher potential returns but also higher risk, while lower cap rates suggest more stable, lower-risk properties in premium locations.

Understanding cap rates is essential for any serious real estate investor. They help set expectations, benchmark deals against market averages, and quickly filter opportunities worth deeper analysis.

When This Page Helps

Cap rate is the common language of real estate investing. When an agent says a property is listed at a "6 cap," experienced investors immediately understand the income-to-price relationship. This calculator lets you quickly verify that claim, compare it to local benchmarks, and reverse-engineer what a property should be worth given its income stream and your target return.

How to Use the Inputs

1. Enter the property's annual Net Operating Income (NOI) — gross income minus operating expenses, excluding debt service.
2. Enter the property's current market value or purchase price.
3. View the calculated cap rate as a percentage.
4. Optionally enter a target cap rate to back-solve the implied property value.
5. Compare the result against local market cap rates to assess whether the deal is fairly priced.

Example Calculation

Tips & Best Practices

• Cap rates vary significantly by market — 4–5% in coastal cities, 7–10% in secondary markets.
• Always verify NOI independently; seller-provided numbers may overstate income or understate expenses.
• Cap rate ignores financing — use cash-on-cash return for leveraged analysis.
• Rising cap rates in a market can signal declining property values even if NOI stays flat.
• Compare cap rates within the same property class (e.g., multifamily vs. retail) for meaningful benchmarks.
• A low cap rate isn't always bad — it may reflect strong tenant quality and long lease terms.

Cap Rate in Context

Cap rate is a snapshot metric — it tells you the yield at the current price and income level but says nothing about future rent growth, appreciation potential, or tax benefits. A 5% cap rate in a rapidly growing market may outperform a 9% cap rate in a declining one when you account for value appreciation and rent increases over 5–10 years.

Market Cap Rate Trends

National average cap rates for multifamily properties have ranged from 4.5% to 7.5% over the past decade, compressing during low-interest-rate environments and expanding when rates rise. Tracking your local market's cap rate trend helps you identify whether deals are getting richer or leaner.

Using Cap Rate to Set Offer Price

Many investors back-solve from a target cap rate to determine their maximum offer. If a market trades at 6.5% and you want a slight discount, target 7% and calculate the value. This discipline prevents emotional overbidding and ensures every deal meets your return threshold before you even tour the property.

Frequently Asked Questions

• What is a good cap rate for an investment property?

  There's no universal answer. In hot markets like San Francisco or New York, 3–5% cap rates are common. In smaller cities, 7–10% is typical. A "good" cap rate depends on your risk tolerance, financing costs, and the property's growth potential. Generally, a cap rate above your cost of capital is desirable.

• What is the difference between cap rate and cash-on-cash return?

  Cap rate measures unlevered return, treating the property as if purchased in all cash. Cash-on-cash return factors in financing and only measures the return on the actual cash you invested. A property with a 6% cap rate could yield 10–12% cash-on-cash with favorable leverage.

• Does cap rate include mortgage payments?

  No. Cap rate uses NOI, which excludes debt service (mortgage payments). This makes cap rate useful for comparing properties regardless of how they're financed. Debt is accounted for in metrics like cash-on-cash return and DSCR.

• Can cap rate be negative?

  Technically yes, if operating expenses exceed gross income, producing a negative NOI. This signals the property is losing money operationally. Negative cap rates are rare and usually indicate vacancy issues, mismanagement, or a property in transition (renovation, lease-up).

• How do rising interest rates affect cap rates?

  Rising interest rates tend to push cap rates higher because investors demand greater returns to compensate for more expensive financing. This can cause existing property values to decline even if income remains steady. The relationship isn't instant but unfolds over 6–18 months as deals reprice.

• Should I use purchase price or market value for cap rate?

  Use market value for evaluating your current portfolio and comparing to benchmarks. Use purchase price (or your offer price) when analyzing prospective deals to see what return you'd lock in. Both perspectives are valuable and should be tracked separately.