Cap Rate Calculator
Quick answer
Cap rate = NOI ÷ price (same period, usually TTM). In most stable markets, going-in caps in the mid–single digits are common—higher caps usually mean more risk, worse growth, or a seller who needs out; lower caps mean the market is pricing safety or growth. Verify against closed comps, not national blog posts.
For a related estimate, see Dscr Calculator.
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Formula and inclusions
Cap rate = NOI ÷ purchase price. NOI = effective gross income − operating expenses. EGI = gross potential rent × (1 − vacancy) + other income (laundry, parking). Operating expenses include everything to run the property except debt service and income taxes. Excluded: mortgage principal, interest, your W-2 income, and capex—if you ignore capex, you are not conservative, you are wrong.
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Cap rate is annual NOI divided by all-in purchase price—yield on the property before you layer in loan terms. Use it to rank offers in the same micro-market and product; for what hits your pocket after debt, jump to cash-on-cash.
How to use this calculator
- NOI = rent − real expenses: Include management, vacancy, taxes, insurance, repairs, and turnover. Exclude mortgage payments—those are not in NOI.
- Use the price you wire: Include closing and immediate repairs needed to collect market rent; exclude wishful “after we fix it” value unless you capitalize it honestly.
- Stress both sides: −8% rent and +12% opex on the same price shows whether you still like the deal when the cycle turns.
Tradeoff: yield vs growth
A 9% cap in a shrinking city can lose to a 5% cap in a supply-constrained market with rent growth—cap rate is not a score; it is one snapshot of income versus price.
Real-world examples
- Case study: $475k fourplex: Gross $62k/yr, 7% vacancy → $57,660 EGI. Operating expenses $23k → NOI ~$34,660. Cap ≈ 7.3% on $475k. If the submarket trades at 6.5% for similar stock, either you found inefficiency or you are missing an expense (e.g., unlicensed units, roof).
- Sensitivity: rent −10%: Same expenses, rent drops 10% → NOI falls roughly $5,700 on this sketch—cap on the same price drops a full point. Thin deals are rent-sensitive; that is why lenders stress DSCR, not just cap.
What to decide
If your cap is 150+ bps above the local band without a story (heavy value-add, distress, or seller finance), assume you missed an expense. If it is far below, you are paying for growth, safety, or ego—name which one before you waive inspection. Stack rental cash flow next to see levered reality.
FAQ
Is a higher cap rate always better?
Higher cap rate usually means higher perceived risk or weaker growth—coastal gateway markets often trade at lower caps than tertiary markets. Compare closed sales in the same neighborhood and vintage.
Should I use pro forma or trailing NOI?
Underwriting on pro forma rent without signed leases is speculation. Trailing-12 NOI plus realistic vacancy beats a broker’s “market rent” line.
How does cap rate relate to cash-on-cash?
Cap rate ignores financing; cash-on-cash divides levered cash after debt by your cash in. Same NOI, a bigger loan can raise or crush cash-on-cash.
Do I include capital reserves in NOI?
Operating expenses should reflect management and routine maintenance; large capex is often modeled separately or as a reserve line—excluding it overstates NOI.
Why would I buy at a low cap?
When you are paying for durable rent growth, replacement cost, or scarcity—low cap is not “bad” if the story is real and stress-tested.