Cap Rate Calculator
Use this cap rate calculator to turn a purchase price and a year of income into NOI and a cap rate the moment you type. Cap rate is the number buyers use to compare real estate deals across markets on equal footing, before financing enters the picture.
Cap rate equals net operating income divided by purchase price, expressed as a percentage. Net operating income, or NOI, is your annual gross rental income minus your annual operating expenses, before any mortgage payment. So if a property produces 90,000 dollars in NOI and you pay 1,200,000 dollars for it, the cap rate is 90,000 divided by 1,200,000, which is 7.5 percent. Cap rate measures the unleveraged annual return the asset produces at today's price, which is exactly why buyers use it to compare deals across different markets. It ignores financing on purpose. Enter your numbers below and the calculator returns NOI and cap rate instantly.
What you would pay for the property today.
All rent and other income the property collects in a year.
Taxes, insurance, management, maintenance, utilities. Not the mortgage.
The annual NOI you could recover, for example by cutting vacancy loss. Recovered rent flows to NOI dollar for dollar, because there are no variable expenses on rent you never collected.
Enter a purchase price and income to see the cap rate.
What is a cap rate?
A cap rate is the annual return a property produces at its purchase price, before financing. It is net operating income divided by price, written as a percentage. If a building throws off 7 cents of NOI for every dollar of price, its cap rate is 7 percent.
I manage 1,500 apartment units across 48 properties in 7 states, and cap rate is the first number I look at on any deal because it strips out how the property is financed. Two buyers can put very different loans on the same building, but the cap rate is the same for both of them. That makes it the cleanest way to compare one asset to another when the financing has not been decided yet.
How do you calculate cap rate?
Divide net operating income by purchase price, then multiply by 100. NOI is gross rental income minus operating expenses, before debt service. The calculator above does this live, but the formula is worth knowing by heart: Cap Rate = NOI / Purchase Price.
The part people get wrong is what counts as an operating expense. Property taxes, insurance, property management, repairs and maintenance, utilities you pay, landscaping, and turnover costs all belong in NOI. The mortgage does not. Depreciation does not, because it is a tax item, not cash out the door. Big capital projects like a roof or a parking lot are usually held out of NOI too, since they are one-time, not annual. Get the expense line honest and the cap rate tells you the truth. Understate expenses and you are just lying to yourself with a spreadsheet.
What is a good cap rate?
A good cap rate depends on the market and the risk. For stabilized multifamily, most deals trade between 5 and 8 percent, with tighter cap rates in major metros and wider ones in smaller markets.
In a strong coastal or gateway market, you might see 4 to 5 percent cap rates on good apartments, because buyers accept a lower current yield in exchange for rent growth and stability. In secondary and tertiary markets, the same class of asset often trades at 6 to 8 percent to compensate for thinner demand and slower growth. Across the properties I run in 7 states, the right cap rate is never a fixed target. It is whatever fairly prices the risk of that specific building in that specific submarket. A 6 percent deal can be a great buy in one city and an overpay in another.
Cap rate vs cash-on-cash return
Cap rate measures the unleveraged return at the purchase price. Cash-on-cash measures the return on the actual cash you put in after financing. They answer two different questions, and you need both.
Cap rate tells you whether the asset is priced fairly against other deals. Cash-on-cash tells you what your money does once the loan is in place, since leverage can push your cash return well above the cap rate when the loan costs less than the property yields, and drag it below when it does not. I use cap rate to decide whether a deal is worth pursuing at all, and cash-on-cash to decide whether the financing actually makes it work for the equity. Judge a deal on the cap rate first. Then check what the debt does to your cash.
How NOI improvements affect property value
Rearrange the cap rate formula and you get the identity that runs multifamily: Value = NOI / cap rate. Cap rate prices the deal. NOI drives the value. Hold the cap rate steady and every dollar you add to NOI is worth one divided by that cap rate in value. At a 6 percent cap rate, one divided by 0.06 is about 16.67, so one dollar of recovered NOI is worth roughly 16.67 dollars of value. That multiplier is the whole game. It is why a 5,000 dollar a month problem is really a 1,000,000 dollar value problem at a 6 percent cap rate, and why I treat NOI as the number the value is built on, not just this year's cash.
Across the 1,500 apartment units across 48 properties in 7 states I run, the most common NOI lever is vacancy. Recovered rent flows to NOI dollar for dollar, because there are no variable expenses on rent you never collected. So when we cut avoidable vacancy, that income lands almost entirely in NOI, and then the cap rate multiplies it into value. Put 40,000 dollars of recovered annual NOI on the books at a 6 percent cap rate and you have created roughly 667,000 dollars of value, off an operational fix, not a market move. The calculator above lets you enter an annual NOI improvement and see the value it creates at your cap rate.
Two honest cautions. First, the value it shows is a valuation estimate at a point-in-time market cap rate, not a guaranteed sale price, and the cap rate has to come from real comparable sales rather than a number you wish for. Second, you cannot reach zero vacancy. A stabilized target is roughly 5 to 8 percent, so model the recoverable portion of vacancy, keep the recovered rent real and sustainable, and do not double-count concessions. Do that and the number tells you the truth about what an operational win is actually worth.
Common questions
What is a good cap rate for multifamily?
For stabilized multifamily, most deals trade between 5 and 8 percent. Major metros with strong demand price tighter, often 4 to 5 percent, because buyers accept a lower current yield in exchange for growth and stability. Smaller and softer markets run wider, 7 to 9 percent, to compensate for the added risk. There is no single good number. A good cap rate is the one that fairly prices the risk of that specific asset in that specific market.
Is a higher or lower cap rate better?
It depends on which side of the deal you are on. As a buyer, a higher cap rate means more current yield for the price you pay, but it usually signals more risk, a weaker market, or an older asset. A lower cap rate means you are paying more for each dollar of income, typically for a safer, higher-growth location. Higher is not automatically better. The cap rate has to match the actual risk.
Does cap rate include the mortgage?
No. Cap rate is calculated on net operating income, which is income after operating expenses but before any debt service. The mortgage payment is deliberately excluded so two buyers can compare the same property on equal footing regardless of how each one finances it. If you want to measure the return on your actual cash after the loan, use cash-on-cash return instead.
What is the difference between cap rate and ROI?
Cap rate measures the unleveraged annual return a property produces at its purchase price, using NOI only. ROI is broader. It can fold in loan paydown, appreciation, tax benefits, and the cash you actually invested, measured over your full hold. Cap rate is a snapshot for comparing deals at a moment in time. ROI is the total picture of what an investment earned you.
Can cap rate be too high?
Yes. A cap rate well above the market for that area is usually a warning, not a bargain. It often means the income is overstated, the expenses are understated, the asset needs capital, or the market is declining. When a deal shows a cap rate that looks too good, verify the trailing twelve months of financials and the rent roll before you trust the number.
How does improving NOI increase property value?
Value equals NOI divided by the cap rate, so at a fixed market cap rate every dollar of added NOI is worth one divided by that cap rate in value. At a 6 percent cap rate, one divided by 0.06 is about 16.67, so one dollar of recovered NOI is worth roughly 16.67 dollars of value. Recover 20,000 dollars of annual NOI at a 6 percent cap rate and you have created about 333,000 dollars of value. That is why operators chase NOI. The gain is a multiple of the income, not the income itself. The number is only as good as the cap rate behind it, so use one derived from real comparable sales.
How much is cutting vacancy worth to property value?
Vacancy is usually the fastest NOI lever, because recovered rent flows to NOI dollar for dollar. There are no variable expenses on rent you never collected, so the rent you win back is close to pure NOI. Take that recovered NOI and divide it by the market cap rate to see the value it creates. On a building losing 30,000 dollars a year to vacancy above a stabilized target, recovering that at a 6 percent cap rate is worth about 500,000 dollars of value. You cannot reach zero vacancy, and a realistic stabilized target is roughly 5 to 8 percent, so model the recoverable portion, not the whole vacancy line.