Cap Rate Calculator for Rental Property (Free Tool + Example)
The cap rate (capitalization rate) of a rental property is its yearly net operating income divided by its price or value. A duplex that costs $300,000 and nets $24,000 a year after operating costs, before the mortgage, has an 8% cap rate. Enter your numbers below to see the cap rate of a rental you own or want to buy.
Cap Rate Calculator
Free to use. Your numbers stay in your browser.
What is cap rate in real estate?
The cap rate shows how much yearly income a property earns compared with its price, as if you paid cash. The formula is:
Cap rate = net operating income (NOI) ÷ price or value × 100
Because it leaves out the mortgage, the cap rate lets you compare two properties fairly, whatever loan each buyer uses. You can also turn the formula around: price = NOI ÷ cap rate. A rental with $24,000 of NOI in an area where similar rentals sell at about a 7% cap rate would be worth roughly $24,000 ÷ 0.07 = $342,857.
What is NOI (net operating income)?
NOI, or net operating income, is what a rental property earns in a year from operating, before the mortgage and income taxes: rent and other income, minus a vacancy allowance, minus operating costs. In the duplex example below, NOI is $24,000. Divide NOI by the price and you get the cap rate.
| Include | Leave out |
|---|---|
| Rent from all units, plus parking, laundry, pet rent and other income | Mortgage principal and interest |
| An allowance for vacancy and unpaid rent | Depreciation |
| Property taxes and insurance | Your income taxes |
| Repairs and maintenance, including a yearly reserve for bigger repairs | One time improvements, like a new roof (many landlords set aside a yearly reserve for these instead) |
| Property management, utilities you pay, HOA fees, lawn care, accounting | Your own time, unless you pay yourself as a manager |
Use real numbers where you can: the tax bill, the insurance quote and the last 12 months of costs from your rental expense spreadsheet. If you are buying, ask the seller for their records and check them.
Example: a $300,000 duplex
A landlord looks at a duplex for $300,000. Each unit rents for $1,500 a month. These are the numbers already filled in the calculator above:
| Line | Yearly amount |
|---|---|
| Rent: 2 units × $1,500 × 12 | $36,000 |
| Vacancy and unpaid rent allowance (5%) | −$1,800 |
| Property taxes | −$4,200 |
| Insurance | −$1,800 |
| Repairs and maintenance | −$3,000 |
| Water and trash the landlord pays | −$1,200 |
| Net operating income | $24,000 |
| Cap rate: $24,000 ÷ $300,000 | 8.00% |
If the landlord hired a manager at 8% of the rent collected (8% × $34,200 = $2,736 a year), NOI would drop to $21,264 and the cap rate to about 7.09%. Small changes in costs move the cap rate, so test a few versions. The numbers in this example are made up.
What is a good cap rate?
There is no single good number. Cap rates depend on the area, the type and condition of the building, local rents and interest rates. In general:
- A higher cap rate means more income for the price, but often comes with more risk: an area with lower demand, an older building or more repairs ahead.
- A lower cap rate is common in areas where buyers expect steady demand and rising values, so they accept less income today.
- The useful comparison is with similar rentals in the same area. A local agent or appraiser can tell you what cap rates recent sales showed.
Cap rate vs cash on cash return
The cap rate ignores the loan. Cash on cash return includes it: it is your yearly cash flow after the mortgage payment, divided by the cash you put in (down payment, closing costs and early repairs). Two buyers of the same duplex see the same cap rate, but a different cash on cash return if one uses a loan and the other pays cash.
| Cap rate | Cash on cash return | |
|---|---|---|
| Uses | Net operating income ÷ price | Cash flow after mortgage ÷ cash invested |
| Includes the mortgage? | No | Yes |
| Best for | Comparing properties | Judging your own deal and loan |
What the cap rate does not show
- Future value: it does not include the property going up or down in value.
- Your loan: a property with a good cap rate can still lose money each month if the mortgage payment is high.
- Big repairs ahead: one year of numbers can hide a roof or furnace that needs replacing soon.
- Optimistic numbers: a cap rate is only as good as the rent and cost figures used. Leaving out vacancy or repairs makes any property look better.
Once you own the rental, track the real income and costs in your rent ledger so you can recheck the cap rate each year.
Check the numbers with your own records and, before you buy, with a qualified professional.
Related free tools
- Rental property expense spreadsheet: track the costs that go into NOI
- Rental property balance sheet: what the rental owns and owes
- Rental depreciation calculator: the yearly tax deduction for the building
- Cash on cash return calculator: the yearly return on the cash you put in, after the mortgage
- Capital gains tax calculator: estimate the tax when you sell
Deciding whether to keep a rental or sell it? Use our rent vs sell calculator.
Watch: how to calculate cap rate, step by step
Simple Rent LedgerFree landlord tutorials on YouTubeFrequently asked questions
What is a cap rate in real estate?
The capitalization rate is a property’s yearly net operating income divided by its price or value. It shows the yearly return as if you paid cash, before any mortgage.
How do you calculate the cap rate on a rental property?
Add up a year of rent and other income, subtract an allowance for vacancy and the yearly operating costs (taxes, insurance, repairs, management, utilities you pay), then divide the result by the price and multiply by 100.
Does the cap rate include the mortgage?
No. Mortgage principal and interest are left out, so you can compare properties no matter how they are financed. Cash on cash return is the measure that includes the loan.
Is a higher cap rate better?
A higher cap rate means more income for the price, but it often comes with more risk, such as weaker demand or more repairs. Compare it with similar rentals in the same area.
What is a good cap rate for rental property?
There is no single good number. It depends on the area, the building and interest rates. The best guide is the cap rate of similar rentals that sold recently nearby.
What is NOI in real estate?
NOI (net operating income) is a property’s yearly rent and other income, minus a vacancy allowance and operating costs such as taxes, insurance and repairs. It leaves out the mortgage and income taxes. Divided by the price, it gives the cap rate.
What is the cap rate formula?
Cap rate = net operating income ÷ property value (or purchase price) × 100. Example: $15,000 NOI ÷ $250,000 = 6%. The mortgage is not included.
