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Cap rate calculator
Capitalization rate, NOI and value
How do you calculate cap rate?
Cap rate is net operating income divided by property value, times 100. Net operating income is gross annual rent less a vacancy allowance less operating expenses — and deliberately excludes mortgage payments, depreciation and income tax, so that two properties can be compared regardless of how each is financed.
Cap rate = NOI ÷ property value × 100 · Property value = NOI ÷ cap rate · NOI = effective gross income − operating expenses
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What is the cap rate formula?
Cap rate, short for capitalization rate, is net operating income divided by property value, expressed as a percentage. It answers one question: what unleveraged annual return does this property produce at this price?
Net operating income is built in two steps. Start with gross scheduled rent for the year, subtract a vacancy allowance to get effective gross income, then subtract operating expenses. What remains is NOI.
The formula rearranges in two useful ways. Divide NOI by a target cap rate and you get the value that cap rate implies — the standard way commercial property is priced. Divide NOI by price and you get the cap rate a given asking price represents, which is how you judge whether that price is reasonable.
| Cap rate | NOI ÷ property value × 100 Expressed as a percentage. Unleveraged and pre-tax. |
|---|---|
| Net operating income (NOI) | effective gross income − operating expenses Excludes mortgage payments, depreciation and income tax. |
| Effective gross income | gross annual rent − vacancy allowance What you realistically collect, not what the rent roll says. |
| Implied value | NOI ÷ target cap rate How income-producing property is priced in practice. |
What belongs in net operating income — and what does not?
Operating expenses are the costs of running the building: property taxes, insurance, management fees, repairs and maintenance, any utilities the owner pays, HOA dues, landscaping, and a reserve for turnover.
Mortgage payments do not belong in NOI, and this is the single most common error. Debt service depends on the buyer — their down payment, their rate, their term — not on the property. Including it would mean the same building had a different cap rate for every possible purchaser, which destroys the only thing cap rate is good for.
Depreciation and income tax are excluded for the same reason. Both depend on the owner’s tax position rather than on the asset. Capital expenditure is a judgement call: a new roof is usually treated as capital rather than operating, but a reserve for it belongs in the expense line if you want NOI to be honest over time.
One consequence worth stating plainly: because NOI excludes financing, a property can have a healthy cap rate and still produce negative cash flow once a mortgage is applied. Cap rate and cash flow answer different questions, and neither substitutes for the other.
| Include | Taxes, insurance, management, maintenance, owner-paid utilities, HOA, reserves The recurring cost of operating the building. |
|---|---|
| Exclude — mortgage payments | Depends on the buyer, not the property Including debt service makes cap rates incomparable between buyers. |
| Exclude — depreciation and income tax | Depends on the owner’s tax position Belongs in an after-tax analysis, not in NOI. |
| Judgement call — capital expenditure | Usually excluded; a reserve is often included Excluding both the item and a reserve overstates NOI over time. |
What is a good cap rate?
There is no universal number, and any source quoting one without naming a market and an asset class is guessing. Cap rate is a price signal: it falls where buyers compete for stable income and rises where they demand compensation for risk.
A high cap rate is therefore not a bargain by default. It usually reflects something the market is pricing in — a weaker location, older construction, shorter leases, higher vacancy risk, or a tenant base with more turnover. The useful question is whether you can measure that risk and still accept the price.
The only meaningful comparison is within the same market and asset class: how does this cap rate sit against recent comparable sales of similar buildings nearby? A cap rate is a relative measure, and it stops meaning anything the moment you compare across cities or property types.
A second check that costs nothing: compare the cap rate to current financing rates. When the cap rate sits below the borrowing rate, leverage works against you — the property earns less than the debt costs, so financing reduces your return instead of amplifying it.
Cap rate — frequently asked questions
How do you calculate cap rate?
Divide net operating income by the property value and multiply by 100. With an NOI of 24,480 dollars and a value of 400,000 dollars, the cap rate is 6.12 percent.
What is net operating income?
Net operating income is effective gross income less operating expenses. Effective gross income is gross annual rent minus a vacancy allowance; operating expenses cover taxes, insurance, management, maintenance, owner-paid utilities and reserves.
Does cap rate include the mortgage?
No. Debt service is excluded on purpose, because it depends on the buyer rather than the property. Including it would give the same building a different cap rate for every purchaser and make comparisons meaningless. Use cash-on-cash return when you want a financed figure.
Does cap rate include depreciation and income tax?
No. Both depend on the owner’s tax position rather than on the asset, so they belong in an after-tax analysis rather than in net operating income.
What is a good cap rate?
There is no universal target, because cap rate is a price signal that varies by market and asset class. It is low where buyers compete for stable income and high where the market prices in risk. Compare only against recent comparable sales in the same market.
What is the difference between cap rate and cash-on-cash return?
Cap rate measures the unleveraged return of the property itself and ignores financing. Cash-on-cash return measures the pre-tax cash flow against the cash you actually invested, so it does include debt service. A property can show a healthy cap rate and still deliver negative cash flow once a mortgage is applied.
How do you use cap rate to value a property?
Divide net operating income by the cap rate you require or the one comparable sales trade at. An NOI of 24,480 dollars at a 6 percent cap rate implies a value of 408,000 dollars. This is the standard approach to pricing income-producing property.
Is a higher cap rate better?
Not by itself. A higher cap rate usually reflects risk the market is pricing in — weaker location, older construction, higher vacancy or tenant turnover. It is attractive only if you can measure that risk and still accept the price.
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One property fits in a spreadsheet. A portfolio does not.
EchoDestiny Real Estate Intelligence computes NOI, yields and cash flow across your entire portfolio, connects them to official market data, and names the source behind every figure.