A cap rate can make a deal look brilliant on a spreadsheet and still lose you money in reality. That's the thing most calculator pages won't tell you -- the number itself is only useful if you know how to read it in context.
This cap rate calculator gives you that starting point. Enter your property value, rental income, operating expenses, and vacancy rate, and you'll get an instant capitalization rate along with your net operating income breakdown. But more importantly, the guide below will help you understand what your result actually means for the specific deal you're evaluating.
What Is Cap Rate (and What It Actually Tells You)
Cap rate -- short for capitalization rate -- measures the annual return a property would generate if you bought it outright with cash. No mortgage, no financing costs, just the raw earning power of the asset relative to what you paid.
Here's why that matters: cap rate strips away all the variables that differ from investor to investor (down payment size, loan terms, tax bracket) and gives you a clean number to compare one property against another. A $150,000 duplex and a $2 million apartment building can be stacked side by side.
But cap rate is not a verdict on whether a deal is good. It's a screening tool. A property with a 9% cap rate isn't automatically better than one at 5%. The 9% property might be in a declining neighborhood with deferred maintenance, while the 5% one sits in a market where values have doubled every decade. Context is everything, and we'll get into that below.
The Cap Rate Formula
The math is straightforward:
Cap Rate = (Net Operating Income / Property Value) x 100
Net Operating Income (NOI) is:
NOI = Gross Annual Income - Operating Expenses - Vacancy Losses
Here's a quick worked example. You're looking at a property listed at $300,000 that rents for $2,500/month ($30,000/year). Operating expenses run 35% of gross income, and you estimate 7% vacancy.
- Gross Income: $30,000
- Operating Expenses: $30,000 x 0.35 = $10,500
- Vacancy Losses: $30,000 x 0.07 = $2,100
- NOI: $17,400
- Cap Rate: ($17,400 / $300,000) x 100 = 5.8%
That 5.8% tells you the property earns about 5.8 cents of net income for every dollar of value each year. Whether that's attractive depends on the market, the property type, and what you're trying to achieve.
What Is a Good Cap Rate?
This is the most common question in real estate investing -- and the honest answer is that it depends. A "good" cap rate changes based on property type, location, market conditions, and your personal investment strategy.
That said, here are the benchmarks that actually matter:
Cap Rates by Property Type
Property Type | Typical Cap Rate Range | What Drives It |
|---|---|---|
Single-Family Rental | 4% - 8% | Lower management intensity, appreciation potential |
Small Multi-Family (2-4 units) | 5% - 9% | Income diversification, moderate complexity |
Large Apartment Complex (5+ units) | 5% - 7% | Institutional demand, professional management |
Retail (Net Lease) | 5% - 7% | Tenant credit quality, lease length |
Office | 6% - 9% | Remote work pressure, market dependent |
Industrial/Warehouse | 5% - 7% | E-commerce demand keeps these competitive |
Cap Rates by Market Tier
Market Type | Typical Range | Examples |
|---|---|---|
Core Urban / Gateway Cities | 3% - 5% | New York, San Francisco, Los Angeles |
Secondary Growth Markets | 5% - 7% | Austin, Nashville, Raleigh, Boise |
Tertiary / Smaller Markets | 7% - 10%+ | Smaller metro areas, rural college towns |
Lower cap rates in gateway cities reflect investor confidence in long-term appreciation and tenant demand. Higher cap rates in smaller markets compensate for less liquidity and more management effort. Neither is inherently better -- they match different investment strategies.
If you're focused on cash flow, look for 7%+ cap rates in stable secondary markets. If you're focused on appreciation, you'll likely accept 4-6% cap rates in growth markets where property values and rents are trending upward.
How to Use This Calculator
- Enter Property Value -- Use the actual purchase price you'd negotiate, not the asking price. If you're analyzing a property you already own, use current market value.
- Enter Annual Gross Income -- Total yearly rent from all units. Use current achievable market rents, not wishful projections. If you're unsure, check comparable rentals in the area.
- Set Operating Expenses Percentage -- Your annual expenses as a percentage of gross income. Start with 30-35% for single-family and 40-50% for multi-family if you don't have exact numbers. This covers property taxes, insurance, maintenance, management, and repairs.
- Set Vacancy Rate -- The percentage of the year you expect the property to sit empty. Use 5% in high-demand markets, 8-10% as a baseline for most areas, and higher for seasonal or student housing.
- Read Your Results -- You'll see your cap rate, total operating expenses in dollars, and annual net income. Compare against the benchmarks above to gauge where your deal stands.
Real-World Cap Rate Examples
The Solid Suburban Rental
A three-bedroom house in a strong school district, listed at $240,000. Comparable rents are $1,800/month. The roof is five years old, HVAC is newer, and vacancy in the area runs about one month per year.
- Property Value: $240,000
- Annual Income: $21,600
- Operating Expenses: 30%
- Vacancy: 5%
Cap Rate: 5.85% | Net Income: $14,040
This is a classic buy-and-hold play. The cap rate isn't eye-popping, but the property is low-maintenance, in a market with steady appreciation, and will likely attract long-term tenants. You're trading current yield for stability and growth.
The Cash Flow Fourplex
A fourplex in a mid-sized Midwest city, priced at $320,000. Each unit rents for $950/month. Building is 25 years old but well maintained. You'll manage through a property manager at 8% of rent.
- Property Value: $320,000
- Annual Income: $45,600
- Operating Expenses: 42%
- Vacancy: 8%
Cap Rate: 7.13% | Net Income: $22,800
Strong cash flow position. The higher cap rate reflects the older building and smaller market, but four income streams reduce your risk if one tenant moves out. At this cap rate, the property pays for itself and then some.
The Urban Appreciation Bet
A renovated one-bedroom condo in a fast-growing city, valued at $400,000, renting at $2,600/month. HOA fees are baked into the expense ratio. Vacancy is essentially zero in this neighborhood.
- Property Value: $400,000
- Annual Income: $31,200
- Operating Expenses: 38%
- Vacancy: 3%
Cap Rate: 4.84% | Net Income: $18,408
The cap rate looks modest, but this is a market where property values have climbed 6-8% annually. Your total return (income + appreciation) could easily reach 10-12%. Investors chasing only cap rate would skip this deal and miss the bigger picture.
The "Too Good to Be True" Deal
A triplex listed at $140,000 with rents totaling $1,800/month. The price seems incredible. But the building needs a new roof ($15,000), the plumbing has issues, and two of the three tenants are month-to-month and behind on rent.
- Property Value: $140,000
- Annual Income: $21,600
- Operating Expenses: 45% (generous estimate given deferred maintenance)
- Vacancy: 15% (reflecting tenant instability)
Cap Rate: 6.17% | Net Income: $8,640
The cap rate looks reasonable on paper, but the reality is much worse. The 45% expense ratio is optimistic once you factor in the roof and plumbing. Actual expenses could push past 60% in the first two years. This is why experienced investors don't just look at cap rate -- they look at what's behind the numbers.
Using Cap Rate to Find Your Maximum Purchase Price
Here's a technique most cap rate guides skip: you can reverse the formula to figure out what a property is worth to you based on the return you need.
Property Value = NOI / Target Cap Rate
Say you need at least a 7% cap rate to make a deal work. You find a property generating $24,000 in NOI. What should you pay?
$24,000 / 0.07 = $342,857
Anything above $342,857 drops your cap rate below your target. This gives you a hard ceiling for negotiations and protects you from overpaying in a heated market.
You can also use this in reverse to figure out what rent you'd need to hit your target cap rate on a property at a given price. It's a powerful sanity check that keeps emotion out of bidding wars.
Common Cap Rate Mistakes
Underestimating operating expenses. This is the single biggest error. New investors often use 20-25% for expenses when reality is closer to 35-50% depending on property type. Underestimate expenses and your "8% cap rate deal" is really a 5% deal -- or worse.
Ignoring vacancy entirely. Many quick cap rate calculations assume 100% occupancy all year. No property achieves that consistently. Even a month of vacancy between tenants, or a slow period finding a renter, drops your actual return meaningfully. This calculator includes vacancy for exactly this reason.
Comparing cap rates across different markets. A 6% cap rate in downtown Denver and a 6% cap rate in rural Kentucky represent completely different risk-return profiles. Always compare within the same market type and property class.
Using cap rate for fix-and-flip properties. Cap rate measures ongoing rental income return. If you're buying to renovate and resell within a year, cap rate isn't the right tool. Use ARV (after repair value) analysis and projected profit margin instead.
Treating cap rate as the only metric. Cap rate tells you nothing about financing leverage, tax benefits, appreciation potential, or total return. It's one lens, not the whole picture.
Cap Rate vs. Cash-on-Cash Return vs. ROI
These three metrics answer different questions about the same investment:
Metric | Question It Answers | Includes Financing? | Best For |
|---|---|---|---|
Cap Rate | What's the property's raw earning power? | No | Comparing properties before choosing financing |
Cash-on-Cash Return | What return am I earning on my actual cash invested? | Yes | Evaluating deals with mortgages and leverage |
ROI | What's my total return including appreciation? | Yes | Measuring long-term investment performance |
Why this matters in practice: Two investors buy the same property with a 7% cap rate. Investor A puts 25% down with a 6.5% mortgage. Investor B pays all cash. Same cap rate, completely different returns.
Investor A's cash-on-cash return might be 9-12% because leverage amplifies rental income relative to the smaller cash outlay. Investor B's cash-on-cash return equals the cap rate at 7% since there's no leverage.
Start with cap rate to screen properties. Move to cash-on-cash return once you know your financing. Use ROI to evaluate performance over time.
When Cap Rate Doesn't Tell the Full Story
Cap rate is a snapshot, not a forecast. There are situations where it can steer you wrong if you rely on it alone:
Value-add properties. A run-down building might show a 4% cap rate based on current below-market rents. But if you renovate and raise rents to market rate, the cap rate could jump to 8%+. The current cap rate disguises the opportunity.
Properties in rapidly appreciating markets. A 3.5% cap rate in a city where values are growing 7% annually might outperform a 9% cap rate in a stagnant market when you calculate total return.
Short-term rentals. Cap rate assumes stable, predictable rental income. If you're running an Airbnb or vacation rental, income fluctuates seasonally and the traditional cap rate formula may overstate or understate your returns.
Properties with below-market or above-market leases. A tenant locked into a below-market lease deflates the cap rate. When that lease expires and you re-lease at market rate, the real cap rate could be significantly higher. The opposite applies for above-market leases about to expire.
The best investors use cap rate as a first filter, then dig into the specifics of every deal before making a decision.