Audited —·Last updated 27 Jul 2026·5 citations·Tier 1·0 uses

Cap Rate Calculator

Calculate capitalization rate for real estate investments. Find property value from target cap rate and compare investment returns. Free calculator.

Cap Rate Calculator

Annual rental income minus operating expenses
$
Total acquisition cost including closing costs
$
Expected vacancy as percentage of gross income
%
Operating expenses as percentage of gross income
%
Capitalization Rate
8.00
NOI divided by purchase price
Implied Property Value
$0.00
Target Cap Rate Input
0.00%
Gross Rental Income
$76,923.08

Background.

The capitalization rate, or cap rate, is the most widely used metric for evaluating income-producing real estate. It expresses the unlevered annual return on a property as a percentage of its purchase price. A 6% cap rate means the property generates net operating income equal to 6% of its value each year, before debt service and income taxes. Cap rates allow investors to compare properties across different markets, asset classes, and price points without the distorting effect of financing structures. Institutional investors, pension funds, insurance companies, REITs, private equity real estate funds, appraisers, commercial lenders, and brokers all rely on cap rates as a primary valuation input.

The income approach to real estate valuation, of which the cap rate is the cornerstone, traces its origins to the early twentieth century. Before the proliferation of modern securitization and complex financial modeling, life insurance companies and savings associations used simple capitalization techniques to value the commercial mortgages and income properties that dominated their balance sheets. The Appraisal Institute formalized the direct capitalization method in the mid-1900s, establishing cap rate extraction from comparable sales as a standard practice. During the savings and loan crisis of the late 1980s, regulators discovered that many institutions had overstated property values by using cap rates that ignored market risk premiums. This led to tightened appraisal requirements under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which mandated independent appraisals for federally related transactions.

Cap rates are inversely related to property values: when cap rates fall, prices rise, and vice versa. In prime markets such as Manhattan, San Francisco, or London, cap rates on stabilized multifamily properties may be as low as 3% to 4%, reflecting investor confidence in sustained rent growth and capital appreciation. In secondary markets or for properties with higher vacancy risk, older construction, or shorter lease terms, cap rates may be 8% to 12%. The spread between market cap rates and the 10-year Treasury yield is a common benchmark for real estate risk premiums. When this spread narrows below 200 basis points, real estate becomes relatively less attractive compared to risk-free bonds, and institutional capital tends to rotate toward fixed income.

The cap rate has well-documented limitations that sophisticated investors must understand. It assumes the property is purchased with cash, ignoring the effects of leverage, which can amplify or erode equity returns depending on the cost of debt. It also assumes constant NOI in perpetuity, while actual income fluctuates with market conditions, tenant turnover, lease rollover schedules, and capital expenditures. The going-in cap rate at purchase differs from the exit cap rate projected at sale, and even small changes in the exit cap rate can materially affect internal rate of return. Banking regulators, including the Federal Reserve and the Office of the Comptroller of the Currency, require cap rate stress testing for commercial real estate loan concentrations. Post-2008 guidance emphasizes that lenders must model cap rate expansion scenarios, not just current market rates, when underwriting long-term holds.

This calculator computes the cap rate from NOI and price, and reverses the formula to find implied value at a target cap rate, providing investors with a rapid initial screening tool grounded in professional appraisal standards.

What is cap rate calculator?

The capitalization rate is the ratio of a property's net operating income to its current market value or purchase price, expressed as a percentage. It measures the unlevered return an investor would earn if the property were purchased entirely with cash and held indefinitely with constant income. Cap rates are used to compare investment opportunities, value properties through the direct capitalization approach, and assess market cycles and risk premiums. A lower cap rate indicates a higher property price relative to income, typical of stable, low-risk markets with strong growth expectations. A higher cap rate indicates a lower price relative to income, often reflecting higher risk, lower growth prospects, or structural deficiencies in the property.

Cap rates are dimensionless percentages, though they implicitly carry a per-year unit since NOI is an annual flow and value is a stock. Typical ranges vary by property type and geography: Class A multifamily in gateway cities may trade at 3.5% to 5%, suburban office at 6% to 8%, and Class C retail in tertiary markets at 9% to 12%. Cap rate differs from cash-on-cash return, which measures levered yield on equity; from internal rate of return, which accounts for the time value of money and all future cash flows; and from dividend yield, which applies to REIT shares rather than direct property ownership. Investors should select the metric that matches their financing structure, holding period, and risk tolerance.

How to use this calculator.

  1. Enter the property's annual net operating income (NOI).
  2. Input the purchase price or current market value.
  3. Optionally enter vacancy and operating expense rates to estimate NOI from gross income.
  4. Optionally provide a target cap rate to calculate implied property value.
  5. Review the capitalization rate percentage.
  6. Compare against market cap rates for similar properties.
  7. Use the implied value output to assess whether the asking price is fair.

The formula.

Cap = NOI ⁄ V ; V = NOI ⁄ Cap
Cap · capitalization rateNOI · net operating income (annual)V · property value ⁄ price

The cap rate formula is a direct ratio: net operating income divided by property value. The result is a dimensionless percentage that represents the annual cash yield on an all-cash investment under the assumption of perpetual, constant income. The formula's simplicity is its greatest strength and its greatest weakness. Because it requires only two inputs, it can be calculated rapidly for any income-producing property. Because it assumes no growth, no leverage, and no terminal value change, it can mislead investors who apply it to properties with complex cash flow profiles.

The inverse formula—value equals NOI divided by cap rate—is used by appraisers, brokers, and lenders to estimate property value. If a property generates $50,000 in stabilized NOI and comparable properties sell at 8% cap rates, the indicated value is $50,000 / 0.08 = $625,000. This is called the direct capitalization approach and is one of three standard valuation methods recognized by the Appraisal Institute, alongside the sales comparison approach and the cost approach. Appraisers extract the cap rate from comparable sales by dividing the buyer's estimated stabilized NOI by the sale price, then adjust for differences in property quality, location, lease terms, and tenant credit.

The relationship between cap rate, discount rate, and growth rate is given by the Gordon growth model: cap rate equals discount rate minus growth rate. This means a property with a 10% discount rate and 2% expected NOI growth has an implied cap rate of 8%. When growth expectations rise, cap rates compress and values rise. When risk premiums rise, cap rates expand and values fall. Dimensional analysis confirms the formula's consistency: NOI is in dollars per year, value is in dollars, and the ratio is per year, or a rate when multiplied by 100. Alternative formulations include the band of investment method, which weights mortgage and equity components, and the Ellwood formula, which accounts for mortgage amortization and holding period.

A worked example.

Example

An investor is evaluating a small apartment building with annual net operating income of $50,000. The seller is asking $625,000. The going-in cap rate is $50,000 / $625,000 = 0.08 = 8.0%. The investor researches comparable sales from the past twelve months and finds that similar stabilized properties in the area trade at 7.5% cap rates. Using the inverse formula, the implied value at a 7.5% cap rate is $50,000 / 0.075 = $666,666.67. This suggests the property may be undervalued by approximately $41,667 relative to market pricing, or the investor may be able to negotiate a lower price. However, the investor must verify that the $50,000 NOI is sustainable by reviewing rent rolls, lease expiration schedules, and historical operating statements. Deferred maintenance, such as a roof nearing replacement, could reduce future NOI. If the investor budgets $20,000 for immediate repairs, the adjusted cap rate on total cost would be $50,000 / $645,000 = 7.75%, still above market. The investor decides to make an offer at $620,000 and conduct full due diligence.

target Cap Rate7.5
noi50,000
purchase Price625,000

Frequently asked questions.

What is a good cap rate?
There is no universal good cap rate; it depends on market conditions, property type, asset class, and investor risk tolerance. In major metropolitan areas such as New York, London, or Tokyo, cap rates of 4% to 6% are typical for Class A multifamily and office properties, reflecting low perceived risk and strong rent growth expectations. In secondary markets or for Class C properties with shorter lease terms and higher tenant turnover, cap rates of 8% to 12% are common, compensating investors for additional risk. Investors should compare the cap rate to alternative investments, financing costs, their required rate of return, and the spread over 10-year Treasury yields. A cap rate that exceeds the investor's weighted average cost of capital by a sufficient margin may be considered attractive, but only if the underlying NOI is stable and verifiable.
Does a higher cap rate mean a better investment?
Not necessarily. A higher cap rate may reflect higher risk, such as a property located in a declining neighborhood, with significant deferred maintenance, facing tenant concentration risk, or subject to lease rollover in a soft market. A lower cap rate in a stable, growing market may produce superior total returns through appreciation and rent growth that outweigh the lower initial yield. Cap rate alone does not capture total return, time value of money, leverage effects, or capital expenditure requirements. Sophisticated investors analyze cap rates alongside internal rate of return, equity multiple, cash-on-cash return, and risk-adjusted metrics. A property with a 10% cap rate but 20% annual operating expense volatility may be less attractive than a property with a 6% cap rate and 5% expense volatility.
What is the difference between cap rate and cash-on-cash return?
Cap rate measures unlevered return: net operating income divided by property value, completely ignoring financing structure. Cash-on-cash return measures levered return: pre-tax cash flow divided by the equity invested. A property with a 6% cap rate can produce a 10% cash-on-cash return if financed with 70% debt at an interest rate below the cap rate. Conversely, if interest rates rise above the cap rate, leverage becomes negative and cash-on-cash return falls below the cap rate. Cap rate is a property-level metric used for valuation and market comparison, while cash-on-cash is an investor-level metric used to assess the yield on actual cash deployed. Institutional investors use cap rates to value assets; individual investors use cash-on-cash to assess personal returns.
How do interest rates affect cap rates?
Cap rates tend to rise when interest rates rise because real estate must compete with higher-yielding bonds, mortgages, and money market instruments for institutional capital. The correlation is not one-to-one because cap rates also reflect growth expectations, risk premiums, and the supply and demand for specific property types. Historically, the spread between commercial real estate cap rates and 10-year Treasury yields has averaged 200 to 400 basis points, though this spread can compress during periods of aggressive capital allocation or expand during credit crunches. When the Federal Reserve raises the federal funds rate, borrowing costs increase, reducing the amount investors can pay for a given NOI and therefore putting upward pressure on cap rates. However, if rate hikes coincide with strong economic growth and rent increases, NOI growth may partially or fully offset cap rate expansion.
Can I use cap rate for single-family homes?
Cap rate is most useful for income-producing properties with multiple units or commercial tenants, such as apartment buildings, office buildings, retail centers, and industrial warehouses. For single-family rentals, investors often use the 1% rule or gross rent multiplier instead, because operating expenses and vacancy rates vary more widely and the sales comparison approach dominates residential valuation. However, cap rate can still be calculated if accurate NOI is available, and it is increasingly used by portfolio operators who own hundreds of single-family rentals and analyze them on a commercial basis. In markets where single-family rentals trade as income assets rather than owner-occupied homes, cap rate becomes a more relevant metric.
What is NOI and how do I calculate it?
Net operating income is gross rental income minus operating expenses, explicitly excluding debt service, capital expenditures, tenant improvement allowances, leasing commissions, and income taxes. Operating expenses include property management fees, property insurance, real estate taxes, routine maintenance and repairs, utilities paid by the owner, landscaping, pest control, and vacancy allowances. NOI is a pre-financing, pre-tax measure of property cash flow that isolates operational performance from capital structure and tax strategy. To calculate NOI, begin with potential gross income, the total rent collectible at 100% occupancy, subtract vacancy and credit loss to arrive at effective gross income, then subtract all operating expenses. Lenders use NOI to calculate debt service coverage ratio; appraisers use it for direct capitalization; investors use it as the starting point for discounted cash flow models.
What is the difference between going-in cap rate and exit cap rate?
The going-in cap rate is the stabilized NOI at purchase divided by the purchase price. It measures the yield at the time of acquisition. The exit cap rate is the projected NOI at sale divided by the expected sale price at the end of the holding period. Investors typically assume the exit cap rate will be 25 to 75 basis points higher than the going-in rate to be conservative, reflecting property aging, lease rollover risk, and market uncertainty. If an investor buys at a 6% going-in cap rate and sells at a 6.5% exit cap rate, the higher exit cap reduces the sale price relative to NOI, lowering the overall internal rate of return. In growth markets, some investors assume flat or even compressing exit cap rates, but this introduces significant projection risk.
How do appraisers use cap rates?
Appraisers use the direct capitalization method: they estimate stabilized NOI and divide by a market-derived cap rate to arrive at a value indication. The cap rate is extracted from comparable sales by dividing the buyer's estimated stabilized NOI by the sale price. Appraisers may adjust the extracted cap rate for differences in property quality, location, physical condition, lease terms, tenant credit, and expected rent growth. They typically use a band of investment method or yield capitalization to support their cap rate selection. In formal appraisal reports, the direct capitalization approach is presented alongside the sales comparison approach and the cost approach, with reconciliation to a final opinion of value. Lenders rely on these appraisals for loan underwriting, and regulators review appraisal practices for compliance with the Uniform Standards of Professional Appraisal Practice.
Are cap rates the same as yield?
Cap rate is a measure of current yield based on a single year's net operating income. It differs from total yield, which includes capital appreciation, and from yield to maturity or internal rate of return, which account for all future cash flows over the holding period. Cap rate is a snapshot metric that assumes perpetual constant income; yield is a forward-looking return concept that can be realized or expected. A property with a 5% cap rate and 3% annual appreciation has an 8% total yield. A bond's yield to maturity accounts for coupon payments and price change; cap rate does not account for price change unless the investor explicitly calculates a total return metric.

References& sources.

  1. [1]Appraisal Institute (2020). The Appraisal of Real Estate, 15th ed. Chicago: Appraisal Institute. ISBN 978-1935328749.
  2. [2]NCREIF (2023). NCREIF Property Index (NPI) Returns.
  3. [3]CBRE (2023). U.S. Cap Rate Survey.
  4. [4]Geltner, D., Miller, N., Clayton, J., & Eichholtz, P. (2014). Commercial Real Estate Analysis and Investments, 3rd ed. Mason, OH: OnCourse Learning. ISBN 978-1133108825.
  5. [5]Federal Reserve (2023). 10-Year Treasury Constant Maturity Rate.
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