Cap Rate Calculator

Cap rate (capitalization rate) is the fastest way real estate investors screen a rental deal: net operating income divided by property value. It answers a simple question, ignoring financing entirely, what return would this property generate if you bought it with all cash?

For a full pro-forma with financing, depreciation, taxes, and a hypothetical sale, use this site's Rental Property Calculator. This one is deliberately just the cap rate, the number investors check first before deciding whether a deal is even worth a deeper look.

For an even faster (if rougher) first pass, this site's GRM Calculator and 1% Rule Calculator screen deals using only price and rent, no expense estimate required.

How does this calculator work?

Enter the property's value (purchase price or current market value), the gross annual rent it collects, an expected vacancy rate, and annual operating expenses (everything except the mortgage: taxes, insurance, maintenance, management, and so on).

First, the calculator applies the vacancy rate to gross rent: effective gross income = gross annual rent × (1 − vacancy rate). This models the realistic assumption that a unit won't be occupied and paying rent 100% of the time.

Next, it subtracts operating expenses from effective gross income to get net operating income (NOI), the property's actual cash-generating power before financing costs enter the picture at all.

Finally, it divides NOI by the property value to get the cap rate: NOI ÷ property value. Because both effective gross income and operating expenses feed into this single number, changing any of the four inputs immediately updates it.

A target cap rate field also works the calculation backward: given the same NOI, it solves property value = NOI ÷ target cap rate, showing the price that would produce whatever cap rate you're aiming for, useful for figuring out your maximum offer price on a deal.

For a deeper walkthrough of this same formula with additional worked examples, see Wall Street Prep's cap rate primer.

Worked example

A $300,000 property with $36,000 in gross annual rent, a 5% vacancy rate, and $10,000 in annual operating expenses.

Effective gross income

$34,200

Net operating income

$24,200

Cap rate

8.07%

How the numbers work

5% vacancy reduces the $36,000 gross rent to $34,200 in effective gross income, the rent actually expected to be collected.

Subtracting $10,000 in operating expenses leaves $24,200 in NOI. Dividing that by the $300,000 property value gives an 8.07% cap rate, the all-cash return this property would generate before any mortgage payment.

Cap rate deliberately excludes financing, which is exactly what makes it useful for comparing properties of different prices and loan structures on equal footing. It's not your actual cash-on-cash return if you finance the purchase; for that, model the mortgage in the full Rental Property Calculator.