The cap rate formula
The capitalization rate (cap rate) measures the annual return on a rental property independent of financing: cap rate% = net operating income ÷ property value × 100. Net operating income (NOI) is the property's rental income minus operating expenses like taxes, insurance, and maintenance, but before mortgage payments. The cap rate lets investors compare properties of different prices on the same yield basis, which is why it is a cornerstone of real estate analysis. Cap rate is a yield measure, so it pairs naturally with the broader ROI calculator.
How to use this calculator
Enter the property's annual net operating income and its value or purchase price. The tool returns the cap rate as a percentage. A higher cap rate generally signals a higher return but often more risk, while a lower cap rate suggests a pricier, more stable asset. To see how long the income takes to recoup the purchase, pair it with the payback period calculator. Comparing buildings is easier once you also know the price per square foot.
Worked example
A property with $12,000 NOI and a $200,000 value: cap rate = 12,000 ÷ 200,000 × 100 = 6%. Price changes move the cap rate inversely:
| NOI | Property value | Cap rate |
|---|---|---|
| $12,000 | $150,000 | 8% |
| $12,000 | $200,000 | 6% |
| $12,000 | $300,000 | 4% |
These figures are an estimate for general information only and are not financial advice; consult a qualified professional before making money decisions. If the deal is financed, the payment from the mortgage calculator tells you what is left after debt service.
Frequently asked questions
- How do I calculate cap rate?
- Divide the net operating income by the property value and multiply by 100. A property with $12,000 NOI and a $200,000 value has a 6% cap rate.
- What is the cap rate on $12,000 NOI and a $200,000 property?
- It is 6%: 12,000 ÷ 200,000 × 100. That is the annual unleveraged return from the property's operating income.
- What counts as net operating income?
- NOI is gross rental income minus operating expenses such as property taxes, insurance, and maintenance. It excludes mortgage payments and income taxes.
- Is a higher cap rate better?
- A higher cap rate means a higher return for the price, but it often reflects more risk or a less desirable location. Lower cap rates usually indicate safer, pricier assets.
- Does the cap rate include my mortgage?
- No, and that is deliberate. Cap rate ignores financing so two properties can be compared regardless of how each is funded. To measure the return on the cash you actually put in after loan payments, look at cash-on-cash return instead.