Transparent method
The formula
Worked example
Example inputs
How to interpret the result
Cap rate measures unlevered operating yield, income relative to property value with no financing involved at all, which is what makes it useful for comparing the raw earning power of different properties independent of how any particular buyer might choose to finance the purchase.
Before you rely on it
What to check
Confirm the income and expense figures used genuinely exclude debt service, since including financing costs defeats the purpose of a measure specifically meant to be financing-neutral.
The common error
Where people go wrong with cap rate calculator
Treating cap rate as a complete measure of investment quality on its own. It reflects unlevered operating yield specifically and says nothing about the leveraged, after-financing return a specific buyer would actually realize.
Sensitivity evidence
How annual gross rental income changes the capitalization rate
| Annual gross rental income | Capitalization rate | Net operating income |
|---|---|---|
| $38,400 | 4.8% | $21,480 |
| $43,200 | 5.8% | $26,040 |
| $48,000worked example | 6.8% | $30,600 |
| $52,800 | 7.8% | $35,160 |
| $57,600 | 8.8% | $39,720 |
Every input, tested
Which input moves the capitalization rate most
| Input | Tested from | To | Capitalization rate at each end | Swing |
|---|---|---|---|---|
| Annual gross rental income | $43,200 | $52,800 | 5.8% to 7.8% | 2.0% (30%) |
| Property value | $405,000 | $495,000 | 7.6% to 6.2% | 1.4% (20%) |
| Annual operating expenses | $13,500 | $16,500 | 7.1% to 6.5% | 0.667% (9.8%) |
| Vacancy and credit loss | 4.0% | 6.0% | 6.9% to 6.7% | 0.213% (3.1%) |
Two variables at once
Capitalization rate by annual gross rental income and vacancy and credit loss
| Annual gross rental income \ Vacancy and credit loss | 3.0% | 5.0% | 7.0% |
|---|---|---|---|
| $38,400 | 4.9% | 4.8% | 4.6% |
| $43,200 | 6.0% | 5.8% | 5.6% |
| $48,000 | 7.0% | 6.8% | 6.6% |
| $52,800 | 8.0% | 7.8% | 7.6% |
| $57,600 | 9.1% | 8.8% | 8.6% |
Step by step
The worked example, input by input
| Input | Value used |
|---|---|
| Annual gross rental income | $48,000 |
| Vacancy and credit loss | 5.0% |
| Annual operating expenses | $15,000 |
| Property value | $450,000 |
| Capitalization rate | 6.8% |
| Net operating income | $30,600 |
Where the inputs come from
Annual gross rental income is the rent at full occupancy for a year, vacancy and credit loss is the share you expect to lose to empty units and unpaid rent, and annual operating expenses are property taxes, insurance, maintenance, management, utilities you pay and reserves, but not the mortgage. Property value is the purchase price or current market value. Use actual figures from the seller's operating statements, and check them against the tax bill and utility records, since sellers often understate costs.
Using the capitalization rate in a real decision
Cap rates move with interest rates and the risk of the market.
When the result stops applying
The cap rate ignores financing, taxes, appreciation and the cost of capital improvements, so two properties with the same cap rate can be very different investments. It relies on a stabilized NOI, and a building with high vacancy or deferred repairs needs adjustments. Cap rates in different property types and cities are not comparable.
What to compare it with
See the NOI and gross rent multiplier calculators for the inputs and the price cross-check, and the cash-on-cash and rental ROI pages for levered returns. The DSCR calculator tests loan coverage, and the break-even occupancy page shows how safe the income is. Verify expenses before trusting any cap rate.
People also ask
Frequently asked questions
What is a good cap rate?
It depends on the market and property type. Higher cap rates mean higher yield and usually more risk, and in many US markets 5% to 8% is common for residential rentals.
Does the cap rate include the mortgage?
No. It is measured on the property's income and value before financing, so it compares properties without regard to how they are bought.
Why do cap rates change over time?
They move with interest rates, rent growth expectations and investor demand, so a falling market rate or strong demand pushes cap rates down and prices up.