Cap Rate Calculator

Cap rate is the unleveraged annual return on an income property.

How the Math Works

The capitalization rate, or cap rate, measures a property's return on investment by comparing its Net Operating Income (NOI) to its current market value. To calculate it, divide the property's annual NOI (gross rental income minus operating expenses, excluding mortgage payments and depreciation) by the property's total value, then multiply by 100 to express it as a percentage. For example, a property valued at $500,000 with an annual NOI of $30,000 yields a cap rate of 6%. This straightforward formula provides a snapshot of the property's inherent earning potential independent of financing structures.

Practical Applications

Use the Cap Rate Calculator when evaluating real estate investment opportunities to quickly compare different properties. Simply input the property's value and estimated annual Net Operating Income to determine its cap rate. This metric helps investors assess which properties offer better returns relative to their cost, identify undervalued properties in strong markets, and make informed decisions about buying, holding, or selling investments. The calculator streamlines what would otherwise be a manual calculation, enabling rapid analysis of multiple properties during your investment research.

Day-to-Day Use

In everyday real estate practice, the cap rate serves as a quick reference point for gauging investment quality and market conditions. As a property owner, you can use it to evaluate whether your rental property is performing in line with neighborhood averages or if adjustments to rent or expenses are needed. For prospective buyers, understanding cap rates helps negotiate fair prices and recognize when a deal might be too expensive relative to its income potential. This knowledge empowers smarter financial decisions whether you're planning to refinance, sell, or simply optimize your existing real estate portfolio.

Worked example

$24,000 ÷ $400,000 → 6%.

FAQ