Cap rate calculator
Enter income, expenses and price, get the cap rate.
What is a cap rate?
The capitalization rate is a property’s net operating income divided by its price: cap rate = NOI ÷ price. The OCC describes it as the ratio used to convert income into value.
What is net operating income?
Annual income from the property minus operating expenses. It leaves out mortgage interest and principal, income taxes and depreciation, but includes a reserve for replacing things like roofs and appliances.
Example
A building with $60,000 of net operating income priced at $1,000,000 has a 6.0% cap rate.
How do I value a property from a cap rate?
Divide the NOI by the cap rate: $60,000 ÷ 0.05 = $1,200,000. A lower cap rate means a higher price for the same income.
Does the cap rate include my loan?
No — it describes the property as if bought with cash. Financing changes your own return (cash-on-cash), not the cap rate.
What is a good cap rate?
There is no single good number, and this page does not suggest one. A cap rate is read from the market: Freddie Mac’s guidance lists comparable sales, published sources, interviews with market participants, and band-of-investment or debt-coverage models as ways to derive it. The OCC adds that rising interest rates can push cap rates up and values down even when the property itself has not changed. Compare a cap rate only with similar properties in the same market.
Which kind of income should be used?
Direct capitalization works with a stabilized NOI, income that is expected to stay steady, according to the OCC. For a building that is still being leased up, or whose income is expected to change a lot, the OCC points to discounted cash-flow analysis instead of a single cap rate.
How the cap rate is calculated
Start with the income the property would earn fully rented, take off a vacancy allowance to get effective gross income, then subtract operating expenses. That result is the net operating income (NOI). The OCC’s definition of operating expenses excludes interest, principal and income taxes, and excludes depreciation and capital items, but includes a replacement reserve for capital items whether or not it is actually set aside. The cap rate is the NOI divided by the price or value. Run the other way, value = NOI ÷ cap rate.
Worked example: $90,000 of rent, $1,000,000 price
Rent when fully leased is $90,000. A 5% vacancy allowance removes $4,500, leaving $85,500 of effective income. Operating expenses of $25,500 bring NOI to $60,000. Divided by the $1,000,000 price, that is a cap rate of 6.00%. The same NOI is worth $1,200,000 at a 5% cap rate and $857,143 at 7%, so a two-point move in the rate changes the value by $342,857.
Common mistakes
Putting the mortgage payment among the expenses mixes financing into a figure that is meant to describe the property alone. Leaving out the vacancy allowance or the replacement reserve overstates NOI; the OCC says the vacancy factor should take into account vacancies in comparable properties in the same market, not just the building’s current occupancy. Using a cap rate on a year of unusual income, such as a building mid-renovation, gives a value that is not reliable. And treating the cap rate as your own return ignores the loan, the purchase costs and taxes.
Sources: Office of the Comptroller of the Currency, Comptroller’s Handbook, Commercial Real Estate Lending, Version 2.0 (March 2022): the glossary definitions of capitalization rate and net operating income, and the “Value Analysis” discussion of direct capitalization; Freddie Mac Multifamily, Capitalization Rate Guidance (March 2025): how cap rates are derived from market data. Compare the return on a financed purchase in the rental property calculator, check the loan-to-value and see the payment in the mortgage calculator.
Estimates for planning only — not financial or tax advice. Your lender, plan or tax professional decides. How we check our calculators.