Cap rate calculator

Cap rate measures property income before financing

Capitalization rate equals annual net operating income divided by property price. It is a screening ratio real-estate investors use to compare properties on operating performance alone, before any particular buyer's loan terms enter the picture.

Who should use this calculator

Use it early, when comparing several properties or asking whether a listed price is reasonable relative to its income, before you have settled on financing. Once you are evaluating one specific property with a specific loan in mind, move to the Rental Cash Flow Calculator, which adds debt service and reserves that this tool intentionally leaves out.

What each input means

• Property price — the purchase price or current value the rate is measured against.
• Monthly rent and other income — scheduled income before any loss, expressed monthly and annualized inside the calculation.
• Vacancy/collection loss — the percentage of scheduled income assumed lost to vacancy and uncollected rent.
• Annual operating expenses — property tax, insurance, management, repairs, and other costs of running the property, excluding the mortgage.

How the calculation works

This calculator adds scheduled rent and other income, subtracts the entered vacancy or collection-loss percentage to get effective income, subtracts annual operating expenses to get net operating income (NOI), and divides NOI by the entered price. Mortgage principal and interest do not belong in operating expenses because cap rate is intended to screen the property independently of a particular buyer's financing.

A worked example, using the figures already loaded above

At the default $3,500 monthly rent, gross annual income is $42,000. A 5% vacancy assumption reduces that to $39,900 of effective income. Subtracting the default $14,000 of annual operating expenses leaves NOI of $25,900. Dividing by the $500,000 default price gives a cap rate of about 5.18%.

How to interpret the result

A cap rate is only meaningful next to other cap rates calculated the same way — the same definitions of income and expenses, for comparable property types in a comparable area. A higher cap rate generally signals higher income relative to price, but it can also reflect higher perceived risk, so it is a starting screen, not a verdict on whether a property is a good investment.

What cap rate cannot answer

• Whether the investment produces positive cash flow after debt service.
• Whether future rent, expenses, vacancy, or value will change.
• Whether capital repairs, taxes, or transaction costs are fully represented.
• Whether the return is appropriate for the location and risk.

Why the result is an estimate

The rate is only as accurate as the rent, vacancy, and expense figures entered. Two people can compute very different cap rates for the same property simply by using different expense assumptions, which is why comparing the underlying inputs matters as much as comparing the final percentage.

Common mistakes to avoid

• Comparing a cap rate you calculated against a market cap rate someone else calculated with different expense assumptions.
• Leaving out management, reserves, or vacancy because the property is currently self-managed or occupied.
• Treating a higher cap rate as automatically the better investment without checking why it is higher.
• Using this ratio to decide whether a specific purchase will cash-flow after a loan — that requires the Rental Cash Flow Calculator instead.

Related guides and calculators

• Rental Cash Flow Calculator — add financing and reserves to see actual monthly cash flow.
• Rental cash-flow basics guide — the full income-to-cash-flow bridge, including where cap rate fits.
• Sell or Rent calculator — compare renting out a property you already own against selling it.

Use consistent income and expense definitions when comparing properties.