# What is the cap rate of this property?

Computes a rental property’s net operating income and capitalization rate (NOI ÷ value), or the value that gives a target cap rate.

- Page: https://www.acalculator.org/finance/cap-rate-calculator
- JSON spec: https://www.acalculator.org/finance/cap-rate-calculator.json
- Version: a719dac0c056

## Default answer

Example with the default inputs (What do you want to find? Cap rate, Property value $350,000.00, Rent per month $2,800.00, Other income per month $200.00, Vacancy rate 5%, Enter the expenses below Per year, Property taxes $4,200.00, Insurance $1,800.00, Maintenance and repairs $2,100.00, Property management $1,680.00, Other expenses $1,200.00): A property worth $350,000.00 with $10,980.00 a year of operating expenses and $23,220.00 a year of net operating income has a cap rate of 6.63%.

## Inputs

| Key | Label | Description |
| --- | --- | --- |
| calculationMode | What do you want to find? | Find the cap rate from the property value, or the property value from a target cap rate. |
| propertyValue | Property value | The price or market value of the property. |
| desiredCapRate | Target cap rate | The cap rate similar properties sell at, used to value this one. |
| grossRentalIncome | Rent per month | The gross rent the property earns each month when fully let. |
| otherIncome | Other income per month | Parking, laundry, storage, and other income each month. |
| vacancyRate | Vacancy rate | The share of the gross income lost to empty units and unpaid rent. |
| expensePeriod | Enter the expenses below | Whether the operating expenses below are typed per year or per month. Switching keeps the typed numbers and reads them in the new period. |
| propertyTaxes | Property taxes | Property taxes, per year or per month as the expense period says. |
| propertyInsurance | Insurance | Property insurance, per year or per month as the expense period says. |
| maintenanceRepairs | Maintenance and repairs | Routine maintenance and repairs, per year or per month as the expense period says. |
| propertyManagement | Property management | Property management fees, per year or per month as the expense period says. |
| otherExpenses | Other expenses | Utilities, HOA fees, and other running costs, per year or per month as the expense period says. |

## Outputs

| Key | Label | Description |
| --- | --- | --- |
| capRate | Cap rate | Net operating income ÷ property value, as a percent. |
| propertyValue | Property value | Net operating income ÷ the target cap rate. |
| noi | Net operating income (NOI) | Effective gross income minus operating expenses, per year. |
| grossIncome | Gross income per year | (Rent + other income) × 12. |
| vacancyLoss | Vacancy loss per year | Gross income × the vacancy rate. |
| effectiveIncome | Effective gross income | Gross income minus the vacancy loss, per year. |
| entered | Operating expenses as entered | The operating expenses added up as typed, with the period chosen for them. |
| expenses | Operating expenses per year | All operating expenses added up, per year. |

## Method

Cap rate = NOI ÷ property value, where NOI = (rent + other income) × 12 × (1 − vacancy) − operating expenses.

## Assumptions

- Rent and other income are per month; the vacancy rate applies to both.
- Operating expenses are per year, or per month times 12 when the expense period is monthly.
- Mortgage payments, income tax, depreciation, and capital improvements are not operating expenses.

## Worked examples

1. calculationMode = cap-rate, propertyValue = $350,000.00, grossRentalIncome = $2,800.00, otherIncome = $200.00, vacancyRate = 5%, expensePeriod = annual, propertyTaxes = $4,200.00, propertyInsurance = $1,800.00, maintenanceRepairs = $2,100.00, propertyManagement = $1,680.00, otherExpenses = $1,200.00 gives noi = $23,220.00, desiredCapRate = 6.634286%, grossIncome = $36,000.00, vacancyLoss = $1,800.00, expenses = $10,980.00. Source: Net operating income and operating expenses: Internal Revenue Service, Publication 527, Residential Rental Property (what counts as a rental expense). https://www.irs.gov/publications/p527.
2. calculationMode = cap-rate, propertyValue = $1,000,000.00, grossRentalIncome = $10,000.00, otherIncome = $200.00, vacancyRate = 10%, expensePeriod = annual, propertyTaxes = $12,000.00, propertyInsurance = $4,000.00, maintenanceRepairs = $6,000.00, propertyManagement = $12,000.00, otherExpenses = $3,000.00 gives noi = $73,160.00, desiredCapRate = 7.316%. Source: Net operating income and operating expenses: Internal Revenue Service, Publication 527, Residential Rental Property (what counts as a rental expense). https://www.irs.gov/publications/p527.
3. calculationMode = property-value, desiredCapRate = 6.5%, grossRentalIncome = $2,800.00, otherIncome = $200.00, vacancyRate = 5%, expensePeriod = monthly, propertyTaxes = $350.00, propertyInsurance = $150.00, maintenanceRepairs = $175.00, propertyManagement = $140.00, otherExpenses = $100.00 gives noi = $23,220.00, propertyValue = $357,230.77. Source: Net operating income and operating expenses: Internal Revenue Service, Publication 527, Residential Rental Property (what counts as a rental expense). https://www.irs.gov/publications/p527.

## FAQ

### What is a cap rate (capitalization rate) and why is it important?

A cap rate is the most fundamental metric in commercial real estate investment, representing the annual return on investment for a property. It's calculated by dividing the Net Operating Income (NOI) by the property's current market value, expressed as a percentage. Cap rates are crucial because they provide a standardized way to compare different properties and assess their relative value and risk. For example, a 6% cap rate means the property generates 6% of its value in annual income before financing costs and taxes.

### What is considered a good cap rate?

There is no single good cap rate. It depends on the property type, the market, and the risk. Lower cap rates usually mean lower-risk properties in prime locations, and higher cap rates suggest higher risk or less desirable areas. Compare a property with recent sales of similar properties in the same area. The best cap rate aligns with your investment goals, risk tolerance, and market conditions.

### What is Net Operating Income (NOI) and how do I calculate it?

Net Operating Income (NOI) is the annual income generated by a property after deducting all operating expenses but before accounting for financing costs, income taxes, and capital expenditures. To calculate NOI: Start with gross rental income plus other income, subtract vacancy allowance to get effective gross income, then subtract operating expenses (property taxes, insurance, maintenance, management fees, utilities if paid by landlord). NOI is the foundation of cap rate analysis.

### What's the difference between cap rate and cash-on-cash return?

Cap rate is an unlevered metric that ignores financing costs, while cash-on-cash return is a levered metric that includes debt service. Cap rate = NOI ÷ Property Value, while Cash-on-Cash = (NOI - Debt Service) ÷ Cash Invested. Cap rates are used to compare properties, while cash-on-cash evaluates specific deal structures. For example, a property might have a 6% cap rate but a 12% cash-on-cash return with leverage.

### How do interest rates affect cap rates?

Generally, as interest rates rise, cap rates tend to expand (increase) because investors require higher yields to compensate for higher borrowing costs. However, this relationship isn't always direct due to other factors like market fundamentals, property type, and location-specific dynamics. The spread between cap rates and interest rates (the risk premium) also fluctuates based on market conditions and investor sentiment.

### Why do cap rates vary by property type?

Different property types have varying risk profiles and operational characteristics. Multifamily and industrial properties typically have lower cap rates due to stable demand and lower operational complexity. Office and retail properties often have higher cap rates due to greater market volatility and operational risks. Hotels typically have the highest cap rates due to their operational intensity and sensitivity to economic cycles.

### What are the limitations of using cap rates?

Cap rates are static metrics that don't account for future growth, financing costs, or capital expenditures. They provide a snapshot of current performance but don't capture the full investment picture. Other limitations include: they ignore appreciation potential, don't consider tax implications, and can be manipulated through aggressive NOI assumptions. For comprehensive analysis, combine cap rate analysis with DCF modeling and other metrics.

### How do I use cap rates to value a property?

To value a property using cap rates, divide the property's NOI by the market cap rate for similar properties. For example, if a property has an NOI of $100,000 and similar properties trade at a 6% cap rate, the estimated value would be $100,000 ÷ 0.06 = $1,666,667. Choose Property value in the calculator to do this. This method is particularly useful for income-producing properties and provides a quick way to assess whether a property is priced fairly relative to the market.

### What factors cause cap rates to change over time?

Cap rates change due to macroeconomic factors (interest rates, economic growth, inflation), market-specific factors (supply and demand, local economic conditions), and property-specific factors (tenant quality, lease terms, property condition, location desirability). Market sentiment and investor appetite for risk also play significant roles in cap rate movements.

### Should I buy a property with a high or low cap rate?

The choice depends on your investment strategy and risk tolerance. Low cap rate properties (3-5%) offer stability and potential appreciation but lower immediate returns. High cap rate properties (8%+) offer higher immediate returns but typically come with higher risk and may require more active management. Consider your goals: income generation vs. appreciation, active vs. passive management, and your timeline for holding the property.

### How does location affect cap rates?

Location significantly impacts cap rates. Properties in prime, high-demand areas typically have lower cap rates (3-6%) because they're considered safer investments with better appreciation potential. Properties in secondary markets or less desirable areas usually have higher cap rates (7-12%) to compensate for increased risk and potentially lower appreciation. Even within the same city, cap rates can vary dramatically between neighborhoods.

### What's the relationship between cap rate and property value?

Cap rate and property value have an inverse relationship. When cap rates increase, property values typically decrease (assuming NOI stays the same). When cap rates decrease, property values typically increase. This is because cap rate = NOI ÷ Property Value. For example, if NOI is $50,000: at 5% cap rate, value = $1,000,000; at 6% cap rate, value = $833,333. This relationship is fundamental to understanding market dynamics.

### How do I compare cap rates across different properties?

When comparing cap rates, ensure you're using consistent assumptions: same vacancy rates, similar expense ratios, and comparable property types. Also consider factors beyond cap rate: property condition, location quality, tenant quality, lease terms, and growth potential. A property with a lower cap rate might be a better investment if it has stronger appreciation potential or better tenant stability. Always perform thorough due diligence.

### What expenses are included in operating expenses for NOI calculation?

Operating expenses include all costs necessary to run the property day-to-day: property taxes, property insurance, maintenance and repairs, property management fees, utilities (if paid by owner), landscaping, HOA fees, pest control, marketing costs, and other routine expenses. They do NOT include mortgage payments, income taxes, capital improvements (like new roofs), or depreciation. Accurate expense estimation is crucial for reliable cap rate analysis.

### How does vacancy rate affect cap rate calculations?

Vacancy rate directly impacts cap rate by reducing the effective gross income. A higher vacancy rate means less rental income, which lowers the NOI and consequently the cap rate. For example, if you expect 5% vacancy, you should reduce your gross rental income by 5% before calculating expenses. This provides a more realistic picture of actual returns and is essential for accurate property valuation.

## Sources

- Direct capitalization, value = NOI ÷ capitalization rate: Appraisal Institute, The Appraisal of Real Estate, 15th edition, chapter on the income capitalization approach.
- Net operating income and operating expenses: Internal Revenue Service, Publication 527, Residential Rental Property (what counts as a rental expense). https://www.irs.gov/publications/p527