Cap Rate Calculator
Calculate the capitalization rate for a real estate investment to evaluate its potential return based on net operating income and property price.
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Enter property details and click calculate to see the cap rate.
Formula Explanation
The capitalization rate is calculated by dividing the Annual Net Operating Income (NOI) by the purchase price of the property:
A higher cap rate generally indicates a higher potential return, but may also indicate higher risk.
What Is a Good Cap Rate?
Cap rate benchmarks vary by property type and market. Residential investment properties in major metros typically see cap rates of 3–5%. Secondary markets often yield 5–8%. Commercial properties (retail, office, industrial) range from 4–9% depending on tenant quality and lease terms. A higher cap rate generally means higher income relative to price — but also higher risk, since properties with lower-quality tenants, shorter leases, or deferred maintenance trade at higher caps to compensate for uncertainty.
Cap rate is most useful as a comparison tool between similar properties in the same market. A 6% cap rate in Dallas and a 6% cap rate in Manhattan represent very different risk profiles and growth expectations — do not compare cap rates across fundamentally different markets without understanding what drives them.
Cap Rate vs. Cash-on-Cash Return
Cap rate treats the property as if purchased all-cash — it ignores financing. Cash-on-cash return accounts for how you actually financed the purchase, dividing annual pre-tax cash flow (after mortgage payments) by the cash invested (down payment + closing costs + renovations). If you buy a property with a 6% cap rate using a mortgage at 7% interest, you are borrowing money at a higher rate than the asset earns — negative leverage that reduces your cash-on-cash return below the cap rate. When borrowing is cheaper than the cap rate, leverage increases cash-on-cash return above the cap rate.
Frequently Asked Questions
What expenses are included in Net Operating Income (NOI)?
NOI = Gross Rental Income − Operating Expenses. Operating expenses include property management fees (8–12% of rent), property taxes, insurance, maintenance and repairs, vacancy allowance (5–10% of potential rent), utilities paid by the landlord, landscaping, and property association fees. NOI does not include mortgage principal or interest payments (financing is excluded), income taxes, depreciation, or capital expenditures for major improvements. Two investors financing the same property differently will have the same NOI and thus the same cap rate — because cap rate is designed to be financing-neutral.
Can cap rate be negative or zero?
Cap rate can theoretically be zero (if NOI is zero) or negative (if operating expenses exceed income). A property with high vacancy, below-market rents, or significant deferred maintenance can produce negative NOI. In practice, a negative cap rate signals a property that is losing money on operations — typically a value-add or turnaround investment where an investor plans to increase NOI through renovation, re-leasing, or expense reduction. Properties with negative cap rates trade at prices that reflect future potential NOI, not current NOI, making valuation more speculative.
How do rising interest rates affect cap rates?
Rising interest rates generally push cap rates higher (and property prices lower) because real estate must compete with risk-free returns from bonds and savings accounts. If Treasury bonds yield 5%, investors demand higher returns from riskier real estate — requiring higher cap rates (lower prices relative to income). This is why the 2022–2023 rate increase cycle caused commercial real estate valuations to fall significantly in many sectors. The effect on residential investment properties was more complex because rent growth partially offset the valuation pressure, but price-to-rent ratios still compressed in most markets.