Cap Rate Calculator

People also ask

What is a cap rate calculator?

A cap rate calculator estimates a rental property's capitalization rate by dividing annual net operating income (NOI) by the property's value or purchase price. It builds NOI from rent, vacancy, other income, and operating expenses, so investors can compare the unleveraged yield of properties across different markets without financing noise.

How do you calculate cap rate?

Cap rate equals annual NOI divided by property value. First compute effective gross income: monthly rent times (1 minus vacancy rate) plus other income, annualized. Then subtract annual operating expenses (taxes, insurance, repairs, management, reserves, but not mortgage payments) to get NOI. Finally divide NOI by the purchase price or current value.

What is a good cap rate in 2026?

Most U.S. residential investors consider 6% to 8% a good cap rate in Class B and C markets, while Class A properties in strong metros commonly trade at 4% to 6% because they carry less risk and more appreciation potential. With mortgage rates around 6.5% to 7% in 2026, a cap rate below your borrowing rate creates negative leverage, which is the more useful warning line than any single national number.

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

Cap rate measures the property's unleveraged yield: NOI divided by price, ignoring the mortgage. Cash-on-cash return measures your leveraged yield: annual cash flow after debt service divided by the cash you invested. Cap rate is best for comparing properties; cash-on-cash tells you what your actual money earns given your specific loan.

Does cap rate include mortgage payments?

No. Cap rate is calculated from net operating income, which is income after operating expenses but before any debt service. That is deliberate: excluding the mortgage makes cap rate a property-level metric that two buyers with completely different financing can both use. To see returns after your loan, use a cash-on-cash return calculator.

Is a higher cap rate always better?

Not necessarily. A higher cap rate means more income per dollar of price, but it usually also signals more risk: weaker tenant demand, older buildings, declining populations, or deferred maintenance. A 9% cap rate in a shrinking market can underperform a 5% cap rate in a growing one once vacancy, repairs, and appreciation are counted. Compare cap rates within a market and property class, not across them.

What is the difference between cap rate and gross rental yield?

Gross rental yield divides annual gross rent by property value and ignores all expenses, while cap rate divides NOI (income after operating expenses) by value. Gross yield is quicker to compute when screening many markets, but cap rate is more honest because two properties with identical rents can have very different tax, insurance, and maintenance loads.

How does vacancy affect cap rate?

Vacancy directly reduces effective gross income and therefore NOI. At an 8% vacancy assumption, a property renting for $2,400 per month loses about $2,300 of income per year to downtime, which can move the cap rate by half a point or more on a typical single-family rental. Underwriting at 0% vacancy is the most common way pro-forma cap rates get inflated.

Can I use cap rate to value a property?

Yes, the same formula rearranges into value = NOI / cap rate, which is how income properties are commonly appraised. If similar properties in the area trade at a 6.5% cap rate and yours produces $19,500 of NOI, the implied value is $300,000. Small changes in the assumed market cap rate move the implied value a lot, so use a range rather than a single number.

Do cap rates change with interest rates?

Over time, yes. Cap rates tend to drift up when borrowing costs rise, because leveraged buyers cannot pay as much for the same NOI, and they compress when rates fall. The spread between cap rates and mortgage rates is a useful market gauge: when cap rates sit below borrowing costs, as in many prime metros in 2026, buyers are effectively paying for expected appreciation.