Cap Rate Calculator guide
Build net operating income line by line, see the cap rate, and solve backward to the most you should pay for a rental at your target cap rate.
The cap rate formula
Cap rate = net operating income ÷ purchase price. Net operating income (NOI) is the rent the property actually collects in a year, minus every cost of running it. It does not subtract the mortgage. That is the point: cap rate measures the property, not your financing, so two buyers with different loans see the same number.
NOI is built in three steps. Gross potential income is full rent for 12 months plus parking, laundry, or storage income. Subtract vacancy and credit loss to get effective gross income. Then subtract operating expenses: property tax, insurance, management, repairs, a capital expenditure reserve, and anything the owner pays such as HOA dues, water, or trash.
Flip the formula and you get the question most investors actually have: price = NOI ÷ target cap rate. If you want a 7 percent cap and the property earns $21,864 NOI, you should not pay more than $312,343. This calculator solves both directions on one screen.
Worked example: a $350,000 duplex
Two units at $1,500 each is $3,000 a month, or $36,000 a year. Allow 5 percent for vacancy and non-payment ($1,800) and effective gross income is $34,200.
Expenses: property tax $4,200, insurance $1,800, management at 8 percent of collected rent $2,736, repairs at 5 percent of rent $1,800, and a CapEx reserve of 5 percent $1,800. Total operating expenses are $12,336, an expense ratio of 36 percent.
NOI = $34,200 − $12,336 = $21,864. Cap rate = $21,864 ÷ $350,000 = 6.25 percent. If your market standard for this kind of property is 7 percent, the price that makes the deal work is $21,864 ÷ 0.07 = $312,343, about $38,000 under asking. That gap is your negotiating script.
What is a good cap rate?
There is no universal good number. Cap rate is the market's price for risk. Class A apartments in coastal metros trade at 4 to 5.5 percent because buyers expect steady rent growth and low vacancy. Single-family rentals in Midwest and Southern cash-flow markets often trade at 7 to 10 percent because the tenant base and appreciation are less certain. A 12 percent cap in a rough neighborhood is not a bargain if turnover eats two months of rent every year.
A useful sanity check: compare the cap rate with your mortgage rate. If the cap rate is below the interest rate, borrowing money makes your return worse, not better (negative leverage). At a 6.25 percent cap and a 7 percent loan, every borrowed dollar costs more than it earns. That deal only works for cash buyers or people betting on appreciation.
Compare cap rates only between similar properties in the same market and the same year. Rates moved up roughly 1 to 2 points across most property types between 2022 and 2024 as interest rates rose, so a comp from 2021 will overstate what a property is worth today.
Mistakes that inflate a cap rate
Using the seller's pro forma. Listing sheets often show NOI with zero vacancy, no management fee ("owner self-manages"), and last year's tax bill. Many counties reassess at sale, so your tax bill will be based on your price, not the seller's 2015 purchase.
Skipping the CapEx reserve. Roofs, HVAC systems, and water heaters wear out on a schedule. A 5 to 10 percent reserve is not optional; leaving it out makes a property look a full point better than it is.
Subtracting the mortgage. Debt service is not an operating expense. If you subtract it you are calculating cash flow, which belongs in a cash-on-cash return calculation, not a cap rate.
Counting management as zero because you will do it yourself. Your time has a price, and the next buyer will underwrite a manager. Put in 8 to 10 percent so the number is comparable.
Cap rate vs other return metrics
Cap rate is a snapshot of year-one, all-cash yield. It ignores leverage, appreciation, and principal paydown. Use it to price and compare properties. Use cash-on-cash return to see what your actual invested dollars earn after the mortgage, DSCR to see whether a lender will finance it, and the gross rent multiplier (price ÷ annual gross rent, shown under the results) as a quick filter before you have expense numbers.
How we calculate: sources
Frequently asked questions
How do you calculate cap rate?
Cap rate = net operating income ÷ purchase price. NOI is annual rent after vacancy minus operating expenses such as property tax, insurance, management, repairs, and a CapEx reserve. The mortgage is not included.
What is a good cap rate for a rental property?
It depends on the market and property class. Prime metro apartments often trade at 4 to 5.5 percent, while single-family rentals in cash-flow markets are commonly 7 to 10 percent. Compare only similar properties in the same market.
Does cap rate include the mortgage payment?
No. Cap rate measures the property as if bought with cash, so financing does not change it. Use a cash-on-cash return calculator to include the mortgage.
How do I find the max price to pay using cap rate?
Divide NOI by your target cap rate. A property with $21,864 of NOI at a 7 percent target is worth $21,864 ÷ 0.07 = $312,343.
What vacancy rate should I use?
Five to eight percent is a common starting point for single-family and small multifamily rentals. Use local rental vacancy data or the property's actual history if it is higher.
Is a higher cap rate always better?
No. A higher cap rate means more income per dollar of price, but it usually signals more risk: weaker tenants, older buildings, or slower appreciation.
Are my numbers saved or uploaded?
Everything runs in your browser. Nothing you enter is uploaded to a server or stored by us.
How do I calculate the maximum price from a cap rate?
Divide NOI by your target cap rate. $21,864 NOI at a 7 percent target gives $21,864 ÷ 0.07 = $312,343.