Cap Rate Calculator

The capitalization rate is the annual unlevered return a property produces relative to its price: cap rate = net operating income ÷ property value. Because it leaves out the mortgage, it lets you compare two buildings on equal terms regardless of how each buyer finances them. Appraisers and commercial brokers also use it in reverse — value = NOI ÷ cap rate — which is why a small change in NOI can move a commercial property's value a lot.

Net operating income (NOI) is all the income the property collects, minus vacancy and all operating expenses. Operating expenses include property taxes, insurance, repairs and maintenance, property management, utilities the owner pays, HOA or common-area costs, and a reserve for replacements. They do not include mortgage principal or interest, depreciation or income taxes.

There is no single right number. Cap rates reflect risk and growth expectations: newer properties in strong, supply-constrained metros may trade at 4–5%, while older properties or smaller markets may trade at 7–10% or more. A higher cap rate means more income per dollar but usually more risk — tenant turnover, deferred maintenance or weaker rent growth. A useful test is to compare a deal's cap rate with your borrowing rate: if the cap rate is below the mortgage rate, leverage will reduce your cash return rather than boost it.

The calculator also shows the expense ratio (operating expenses as a share of effective income — 35–50% is typical for small residential rentals) and the gross rent multiplier, a quick screen that divides price by annual gross rent. If you want the return on your own cash after the mortgage, use the cash-on-cash calculator.

A four-unit building is listed at $500,000 and rents for $4,000 a month in total. Annual gross rent is $48,000; with a 5% vacancy allowance, effective gross income is $45,600. Operating expenses are $15,000, so NOI is $30,600. The cap rate is 30,600 ÷ 500,000 = 6.12%. If you require a 7% cap rate for this market and condition, the property is worth about 30,600 ÷ 0.07 ≈ $437,000 to you — a useful anchor for your offer.