Cap Rate Calculator: How to Calculate Capitalization Rate

What Is Cap Rate?

Capitalization rate — or cap rate — is one of the most widely used metrics in commercial and residential real estate investing. It measures the rate of return on a property based on the income it generates, independent of financing.

Cap rate answers a simple question: if you bought this property with all cash, what annual return would the net operating income represent? Investors use it to compare properties across markets, asset classes, and price points on an apples-to-apples basis.

Cap Rate Formula

The standard cap rate formula is:

Cap Rate = Net Operating Income (NOI) ÷ Current Market Value

NOI is your total rental income minus all operating expenses — property taxes, insurance, maintenance, management fees, vacancy allowance, and utilities you cover as the landlord. It does not include mortgage payments, depreciation, or income taxes.

What Is a Good Cap Rate?

There is no universal "good" cap rate. Higher cap rates generally indicate higher returns but often come with higher risk — think Class C properties in emerging neighborhoods. Lower cap rates are typical in stable, high-demand markets like major metro areas.

• 6–8%: Common in strong primary markets with appreciation potential
• 8–10%: Solid cash-flow markets in the Midwest and South
• 10–12%+: Higher-risk or value-add opportunities
• Below 5%: Premium markets where investors bet on appreciation

How to Use Our Cap Rate Calculator

Our cap rate calculator lets you enter monthly rent, vacancy rate, detailed operating expenses, and property value to instantly see your NOI, cap rate, and expense ratio. Use the detailed expense view to capture every line item lenders and experienced investors expect to see.

Run the numbers on your next deal before making an offer. A property that looks profitable on gross rent alone can tell a very different story once you account for realistic vacancy and maintenance reserves.