Cap Rate Calculator
The capitalization rate, or 'cap rate,' is the single most-quoted number in commercial real estate because it strips financing out of the picture and expresses a property's unleveraged annual yield as a clean percentage. It is calculated by dividing Net Operating Income — the rent a property produces after operating expenses but before debt service — by the purchase price or current market value. A higher cap rate signals higher potential return but usually more risk or a weaker location, while a lower cap rate reflects a premium, stabilized asset in a strong market. Investors use the cap rate to compare wildly different properties on an apples-to-apples basis, to reverse-engineer a fair offer price, and to gauge whether a market is heating up or cooling down. Enter your income, expenses, and price to benchmark any deal instantly.
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Results update live as you type. Estimates only — not financial, tax, or investment advice.
The Formula
Cap Rate = (Net Operating Income ÷ Property Value) × 100
Understanding the Cap Rate Calculator
Cap rate is best understood as the return you would earn if you bought a property outright with cash and no mortgage. Because it removes financing from the equation, it lets you compare a fourplex, a strip mall, and an apartment building on identical footing. The relationship runs both ways: if you know the market cap rate for an asset class, you can divide a property's NOI by that rate to estimate its fair value — the exact method commercial appraisers use to price income property.
What counts as a 'good' cap rate is entirely relative to the market and the asset. Prime properties in major coastal cities routinely trade at 4–5% caps because buyers accept lower yields for safety and appreciation, while secondary markets and older assets might trade at 7–10%. A higher cap rate signals more income relative to price, but usually reflects more risk, weaker tenants, or a softer location. Watch the spread between cap rates and interest rates: when your borrowing cost exceeds the cap rate, the deal carries negative leverage.
Frequently Asked Questions
What is a good cap rate for real estate?
There is no universal number — a good cap rate depends on the market and asset class. Stabilized properties in strong metros often trade at 4–6%, while higher-risk or secondary-market assets may offer 7–10%. Always compare a property's cap rate to recent sales of similar assets in the same submarket rather than to a national average.
Does cap rate include the mortgage?
No. Cap rate is calculated from Net Operating Income, which is measured before any debt service. This is intentional — it lets investors compare properties independently of how each buyer chooses to finance them. To factor in your specific loan, use the cash-on-cash return or DSCR instead.
Is a higher or lower cap rate better?
It depends on your goal. A higher cap rate means more income per dollar and a lower purchase price, but typically more risk. A lower cap rate reflects a premium, stabilized asset with stronger appreciation potential. Value-add investors chase higher caps; wealth-preservation buyers accept lower ones.