Cap rate calculator

The cap rate formula

Take a year of rent, subtract an allowance for vacancy, then subtract the operating expenses. That is the net operating income (NOI). Divide it by the purchase price and show it as a percentage.

The loan doesn't appear anywhere in the formula. That is the point of a cap rate: it describes the property, not the way you pay for it, so two buyers with different loans see the same cap rate.

What counts as an operating expense

Operating expenses are the costs of running the property, whoever owns it. The calculator counts:

• Vacancy (as lost rent, before expenses)
• Property management, as a share of the rent collected
• Maintenance and capital expenditures, set aside as a share of the gross rent
• Property tax, insurance and the HOA fee
• Any other monthly costs you pay as the owner

Cap rate vs cash-on-cash return

Cap rate ignores financing. Cash-on-cash return includes it: it divides the cash flow after loan payments by the cash you actually put in. A leveraged purchase can have a higher or lower cash-on-cash return than its cap rate, depending on the interest rate.

Use the cap rate to compare properties with each other, and cash-on-cash return to judge a purchase with your own loan. The calculator shows both.

Reading a cap rate the way an appraiser does

Cap rate turns a year of income into a price and back again. Divide NOI by the cap rate buyers expect in an area and you get a rough income value; divide NOI by an asking price and you get the cap rate that price implies. That is why investors compare it across listings before they look at any loan.

Because the formula has only two parts, small changes move it a lot. A higher vacancy allowance, a management fee you had forgotten, or a reassessed property tax all lower NOI and with it the cap rate. A lower purchase price raises it. Try each in the calculator to see which assumption matters most for the home you're looking at.

Gross yield is not cap rate

Gross yield divides a year of rent by the price and stops there. Cap rate takes off vacancy and every operating cost first, so it is always lower for the same home. When a listing quotes a yield, ask which one it means, and recompute it here with the expenses filled in.

What is a good cap rate?

There is no single good number. Cap rates differ by market, property type and condition, and a higher cap rate often comes with more risk or less expected growth. Compare a property with similar homes in the same area, worked out the same way, with the same expenses counted.

Watch for listings that quote a cap rate without vacancy, management or maintenance: they look better than the property will perform.