Cap Rate Calculator
Calculate the capitalization rate on any rental property in seconds. Enter the purchase price and rent, and we'll handle the NOI math and tell you whether the cap rate is strong, solid, or low for the market.
Property Details
Enter the purchase price and rent, and we'll handle the rest.
Taxes, insurance, maintenance, management, capex. The 50% rule is a common starting point; the typical range is 35% to 50%.
Average across the US is ~6%. Tight markets run 2% to 4%; weaker ones 8%+.
Your Cap Rate
Common in major metros where appreciation drives total return more than cash flow.
What is cap rate?
Cap rate (capitalization rate) is the ratio of a rental property's annual net operating income to its purchase price. It tells you what the property would yield as a pure cash investment, before financing. Investors use it to value income properties and to compare deals across markets on an apples-to-apples basis.
The formula
What counts as a good cap rate?
- 3% to 5%: Major metros (NYC, SF, LA, Boston, Seattle). Low yield, but appreciation drives total return.
- 5% to 7%: Solid secondary markets (Charlotte, Nashville, Phoenix, Tampa, Denver). The sweet spot for most investors.
- 7% to 9%: Cash-flow markets (Cleveland, Memphis, Indianapolis, Birmingham, Pittsburgh). High yield, less appreciation.
- 9%+: Often signals risk: declining areas, deferred maintenance, or unstable tenant base. Worth a closer look before buying.
What cap rate doesn't tell you
Cap rate ignores financing, appreciation, tax benefits, and capex timing. Two properties with identical 6% cap rates can have very different returns once you layer in a mortgage, depreciation, and local rent growth. Use cap rate to screen deals quickly, then run a full analysis on the ones that pass.
Frequently asked questions
What is a cap rate?
The capitalization rate (cap rate) is the ratio of a rental property’s annual net operating income (NOI) to its purchase price. It measures the unlevered return: the cash yield you would earn if you bought the property in cash. Cap rate = NOI ÷ Purchase Price.
How do you calculate cap rate?
Cap rate = Net Operating Income ÷ Purchase Price × 100. NOI is gross rental income minus vacancy loss minus operating expenses (taxes, insurance, maintenance, property management, capex reserves). NOI does NOT subtract mortgage payments. Cap rate is unlevered by definition.
What is a good cap rate?
A "good" cap rate depends on the market. In major metros (NYC, SF, LA, Boston), cap rates of 3% to 5% are normal because investors expect appreciation. In secondary cities and the Midwest/South, 6% to 8% is common. Cap rates above 9% often signal higher risk: weaker tenant demand, deferred maintenance, or declining markets.
Does cap rate include the mortgage?
No. Cap rate is intentionally calculated before debt service so you can compare properties apples-to-apples regardless of how each is financed. To factor in your mortgage, use cash-on-cash return instead.
What’s the difference between cap rate and cash-on-cash return?
Cap rate measures the unlevered return on the full purchase price. Cash-on-cash return measures the levered return on your actual cash invested (down payment + closing costs + renovations). With financing, cash-on-cash is usually higher than cap rate because you’re using leverage.
How do I estimate operating expenses?
A common starting point is the "50% rule," which assumes operating expenses run 50% of gross rent. For a more refined estimate, sum: property taxes (1% to 2% of value), insurance (0.5% to 1%), maintenance (5% to 10% of rent), property management (8% to 10% of rent), and capex reserves (5% to 8% of rent). Newer, lower-rent properties tend toward 35% to 40%; older, higher-turnover properties run 45% to 55%.
Should I use this for commercial real estate?
The math is identical. Cap rate is the standard valuation metric for multifamily, retail, office, and industrial. The main difference is operating expense ratios. Commercial leases often pass expenses through to the tenant (NNN), so you’d enter a lower expense rate.
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