Cap Rate Calculator: Rate, Value or Net Operating Income
Find a rental property's capitalization rate from its net operating income and price, or turn a cap rate into a value or the income it implies.
Cap rate is a property's net operating income for one year divided by its value or price. A building that brings in $120,000 a year, loses 5% to vacancy and costs $42,000 to run has a net operating income of $72,000; at a $1,200,000 price, that is a 6.00% cap rate.
This calculator works through cap rate arithmetic for general education; it is not financial advice, investment advice, an appraisal, or a recommendation to buy or sell any property. A cap rate is only as good as the income and expenses you enter, and it leaves out financing, taxes, rent changes and sale costs. Talk with a licensed appraiser, lender or financial professional before you decide anything about a real property.
Operating expenses are taxes, insurance, repairs, management and utilities you pay; leave out mortgage payments and depreciation. Dollars take two decimals, rates four.
Cap rate
6.00%
- Vacancy and credit loss
- $6,000.00
- Effective gross income
- $114,000.00
- Net operating income
- $72,000.00
- Property value
- $1,200,000.00
- Cap rate
- 6.00%
One year of income, before financing and income tax. NOI = effective gross income minus operating expenses; cap rate = NOI / value.
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About the Cap Rate Calculator
Appraisers use the cap rate to turn one year of income into a value, and investors use it to compare properties of different sizes on the same scale. Everything rests on net operating income: what the property collects after vacancy, minus what it costs to run, such as property taxes, insurance, repairs, management and utilities the owner pays. Mortgage payments are left out on purpose, so the rate describes the building rather than the loan, and two buyers with different financing see the same figure. The formula works three ways. Divide net operating income by value for the rate, as in the HUD handbook's example of $94,000 of net income on a $1,000,000 sale, a 9.4% rate. Divide income by a rate for a value, so $15,200 at 8% is $190,000. Multiply a value by a rate for the income it implies. Because value and rate move in opposite directions, the same $72,000 of income is worth $1,440,000 at a 5% rate and $1,200,000 at 6%. The calculator uses one year of income and does not project rent growth or a later sale.
Frequently asked questions
How do you calculate cap rate?+
Divide one year of net operating income by the property's value or price. $72,000 of net operating income on a $1,200,000 property is 72,000 / 1,200,000 = 0.06, a 6.00% cap rate.
What counts as an operating expense?+
The recurring costs of running the property: property taxes, insurance, repairs and maintenance, management fees, and any utilities or services the owner pays. Mortgage principal and interest, depreciation and the owner's income tax are not operating expenses, so leave them out.
Why does a higher price mean a lower cap rate?+
The income stays the same while the price it is divided by grows. Paying $1,440,000 for $72,000 of net operating income is a 5.00% cap rate; paying $1,200,000 for the same income is 6.00%.
Is cap rate the same as my return?+
No. It ignores financing, so it is not your cash-on-cash return when you borrow, and it is one year of income, so it leaves out rent changes and any gain or loss when you sell. Use it to compare properties, not to predict what you will earn.
Net income divided by the overall capitalization rate gives value, with the $94,000 and $15,200 examples: HUD Handbook 4465.1, Chapter 7, Income Approach to Value.
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