Cap Rate Calculator
Find a property cap rate and net operating income from the rent, vacancy, and operating expenses, the yield you can compare across deals.
Want to understand the concept, not just the number? Read The Real Estate Investing Guide .
How it's calculated
The cap rate, short for capitalization rate, is the single most quoted number in real estate investing. It is the net operating income divided by the price. Because it ignores the mortgage, it lets you compare two properties on equal footing, no matter how each one is paid for. Think of it as the yield the building throws off if you bought it with cash.
Start with the rent. A property renting for $2,500 a month brings in $30,000 a year. Take out a 5 percent vacancy allowance for empty months and turnover, and it collects $28,500. That is the effective gross income. Subtract the operating expenses, the property tax, insurance, maintenance reserve, and management, which here total $8,700, and you are left with $19,800 of net operating income.
Divide that $19,800 by the $300,000 price and you get a 6.6 percent cap rate. A higher cap rate means more income for the price, which usually points to a cheaper property or a higher-risk area. A lower cap rate means you are paying more for each dollar of income, common in strong, stable markets where buyers accept a lower yield for safety and growth. Compare the cap rate to what similar properties trade at locally, since a good cap rate in one city is a poor one in another.
Assumptions
- Cap rate is net operating income divided by the purchase price. Operating expenses exclude the mortgage, so the figure reflects the property, not your financing.
- Net operating income is the rent after a vacancy allowance minus the operating expenses you enter. Appreciation is not part of the cap rate.
Last updated: 2026-08-08
These assumptions follow our general methodology.
Frequently asked questions
What is a good cap rate?
It depends entirely on the market and the property type. Rates of 4 to 5 percent are common in expensive, stable cities, while 7 to 10 percent shows up in cheaper or higher-risk areas. A good cap rate is one that fairly pays you for the risk and matches what comparable local properties trade at.
Does cap rate include the mortgage?
No. Cap rate deliberately leaves out financing so it measures the property itself. Two buyers, one paying cash and one borrowing, see the same cap rate. To fold in your loan, look at cash-on-cash return instead, which the Rental Property ROI calculator shows.
Is a higher or lower cap rate better?
Neither is simply better. A higher cap rate means more income per dollar of price, but often more risk or less growth. A lower cap rate usually means a safer, faster-growing market where buyers accept a smaller yield. Match the cap rate to the risk you are taking.
How is cap rate different from ROI?
Cap rate is the unleveraged yield, income over price, and it says nothing about your loan. Return on investment folds in financing, cash flow, and sometimes appreciation and tax effects. Cap rate is best for comparing properties, ROI for judging your own deal.