This cap rate calculator helps you evaluate rental property investments by calculating your potential return based on net operating income and property value. Whether you're comparing multiple properties or analyzing your first investment deal, this tool gives you instant insight into expected annual returns without the complexity of spreadsheets or formulas.

Understanding your property's cap rate is essential for making informed investment decisions. A 7% cap rate means you can expect a 7% annual return on your property value from rental income—for example, a $300,000 property would generate $21,000 in net income per year. This calculator factors in operating expenses and vacancy rates to give you realistic projections you can actually use when negotiating deals.

Your calculated cap rate tells you what kind of return you can expect from this property before accounting for mortgage payments. Here's what that number means in practical terms:

For every $100,000 in property value, your cap rate percentage represents thousands in annual net income. An 8% cap rate on a $250,000 property means approximately $20,000 per year in cash flow before your mortgage payment.

Is your cap rate good? That depends on your market and property type. Here's how your results compare to typical ranges:

| Property Type | Typical Cap Rate Range | What It Means |
|--------------|------------------------|---------------|
| Single-Family Rental | 5-9% | Moderate cash flow with appreciation potential |
| Small Multifamily (2-4 units) | 6-10% | Balanced income and growth |
| Large Multifamily (5+ units) | 4-7% | Lower risk, institutional quality |
| Commercial Property | 6-10% | Varies significantly by location and tenant quality |

The good news is that understanding where your cap rate falls helps you identify what kind of investment you're looking at. A 5% cap rate in a growing market like Austin suggests you're betting on appreciation, while a 10% cap rate in a Midwest market means you're prioritizing monthly cash flow over property value growth.

Remember that cap rates vary significantly by region. What's considered strong in San Francisco (4-5%) would signal serious problems in Indianapolis (where 8-10% is normal). Always compare properties within the same market for meaningful analysis.

Cap rate (capitalization rate) measures the annual return on a rental property based on its net operating income and current market value. Think of it as the property's "yield" if you paid cash—similar to how a bond's yield tells you annual return on your investment.

Real estate investors use cap rate for three main reasons:

1. Quick Property Comparison - Compare a $200,000 duplex with a $400,000 fourplex instantly, regardless of price differences. The higher cap rate indicates better income relative to price.

2. Market Analysis - Identify whether you're in an appreciation market (lower cap rates) or cash flow market (higher cap rates). This shapes your entire investment strategy.

3. Value Assessment - Determine if asking prices align with income potential. A seller asking $300,000 for a property generating $15,000 NOI is reasonable (5% cap rate), but $450,000 would be overpriced (3.3% cap rate) unless you're banking on significant appreciation.

What cap rate measures: The property's income-generating ability independent of financing.

What cap rate doesn't measure: Your actual cash returns after mortgage payments (that's cash-on-cash return), tax benefits, appreciation potential, or total return on investment.

The cap rate formula is straightforward:

Cap Rate = (Net Operating Income / Property Value) × 100

Let's break down what that actually means:

Start with your annual gross rental income, then subtract operating expenses:

NOI = Gross Rental Income - Operating Expenses - Vacancy Loss

What to include in operating expenses:

• Property taxes
• Property insurance
• Maintenance and repairs
• Property management fees
• HOA fees (if applicable)
• Utilities (if you pay them)

What NOT to include:

• Mortgage payments (cap rate excludes financing)
• Capital improvements (these increase property value)
• Income taxes (personal tax situation varies)
• Depreciation (accounting concept, not cash expense)

Take your annual NOI and divide it by the property's current market value or purchase price.

Multiply by 100 to get your cap rate percentage.

Property: 3-bedroom rental house in Charlotte, NC

• Purchase price: $280,000
• Monthly rent: $2,200
• Annual gross income: $26,400

Operating Expenses:

• Property tax (1.0%): $2,800
• Insurance (0.6%): $1,680
• Maintenance (1.5%): $4,200
• Property management (10% of rent): $2,640
• Total operating expenses: $11,320

Vacancy (5%): $1,320

NOI Calculation: $26,400 (gross income) - $11,320 (expenses) - $1,320 (vacancy) = $13,760 NOI

Cap Rate Calculation: $13,760 / $280,000 = 0.0491 = 4.91% cap rate

This tells you the property generates a 4.91% annual return on its value, which is typical for a single-family rental in a growing Sunbelt city like Charlotte where investors expect property value appreciation.

Input the purchase price you're considering or the current market value if you already own the property. Use the actual purchase price for the most accurate cap rate calculation.

This is total rental income before any expenses. If rent is $1,500/month, enter $18,000 ($1,500 × 12 months).

For properties with multiple units, add all units together. A duplex renting for $1,200 and $1,100 would be $27,600 annually.

This is where many investors make mistakes. Here's a realistic breakdown by expense type:

Typical Operating Expense Breakdown:

• Property Tax: 0.5-2.5% of property value (varies by state)
• Texas: ~2.0%
• California: ~0.8%
• Indiana: ~1.0%
• Insurance: 0.5-1.0% of property value
• Higher in coastal areas, lower in landlocked states
• Maintenance: 1.0-2.0% of property value
• Older homes: 2-3%
• Newer homes: 1%
• Property Management: 8-10% of gross rental income
• Self-managing? Still factor this in for realistic comparison
• HOA Fees: Varies significantly (add if applicable)

Total operating expenses typically range from 30-50% of gross rental income. New investors often estimate too low—40% is a reasonable starting point for most single-family rentals.

Your vacancy rate accounts for time between tenants, evictions, or repairs preventing rental.

Realistic vacancy rates:

• Strong rental markets: 5-8%
• Average markets: 8-10%
• Weaker markets: 10-15%

Don't use 0% unless you have multi-year corporate leases. Even the best property sits empty during tenant transitions.

The calculator shows your operating expenses total, annual net income (NOI), and cap rate percentage. Use these numbers to compare against other properties or market benchmarks.

Different property types typically show different cap rate ranges because they carry different risk and return profiles:

Single-family rentals usually have lower cap rates because they attract both investors and owner-occupants, keeping prices competitive. You're often betting on some appreciation alongside cash flow.

Example scenario: A $225,000 single-family home in Nashville generating $1,650/month rent might show a 6% cap rate—modest cash flow but strong appreciation potential in a growing city.

Duplexes, triplexes, and fourplexes offer better cap rates than single-family homes because they're primarily investment properties. Multiple units also mean better income stability if one unit is vacant.

Example scenario: A $420,000 fourplex in Columbus, OH with $3,200/month total rent could deliver an 8% cap rate—solid cash flow with moderate growth potential.

Larger apartment buildings typically show lower cap rates because they're considered less risky by institutional investors. Professional management, economies of scale, and stable income streams make them attractive despite lower yields.

Example scenario: A 12-unit apartment building in Denver at $2.1 million generating $168,000 annual NOI shows a 5% cap rate—lower cash flow but institutional-grade quality with professional management.

Commercial cap rates vary dramatically based on location, tenant quality, and lease terms. A net-leased Walgreens might show a 5% cap rate due to credit tenant and zero landlord responsibilities, while a small strip center could be 9% due to higher management intensity.

Understanding regional cap rate variations helps you set realistic expectations and identify opportunities:

Cities like San Francisco, Los Angeles, Seattle, and Miami show compressed cap rates because investors accept lower current income in exchange for property value growth.

Example: A $950,000 San Francisco condo generating $4,000/month rent ($48,000 annually) with $18,000 in operating expenses and minimal vacancy shows a 3.2% cap rate. Investors tolerate low cash flow because they expect 4-6% annual appreciation.

Cities like Charlotte, Phoenix, and Austin offer middle-ground scenarios with decent cash flow and growth potential.

Example: A $380,000 Phoenix rental house generating $2,800/month shows a 6.8% cap rate after expenses. You get reasonable monthly income plus participation in a growing market.

Midwest and Rust Belt cities like Cleveland, Indianapolis, and Kansas City offer higher cap rates because property values remain stable or grow slowly, making current income the primary return driver.

Example: A $140,000 Cleveland duplex generating $1,900/month total rent could deliver a 10% cap rate. Strong monthly cash flow compensates for minimal appreciation expectations.

The key insight is that lower cap rates aren't automatically worse—it depends on your investment strategy. If you need income today, chase higher cap rates in cash flow markets. If you're building long-term wealth and can carry negative cash flow short-term, appreciation markets with lower cap rates might serve you better.

This is the most frequent error new investors make. Cap rate measures how the property itself performs, regardless of financing.

Why this matters: Two investors buying the same $200,000 property with a 7% cap rate will both see $14,000 in annual NOI. One puts 50% down, the other pays cash. Their mortgage payments differ, but the property generates the same $14,000 regardless. That's why mortgage doesn't factor into cap rate—it measures property performance, not your leveraged returns.

For returns after mortgage payments, calculate cash-on-cash return instead.

Entering 0% or 2% vacancy inflates your cap rate artificially. Even with great tenants, you'll face turnover eventually.

Reality check: Most markets average 8-10% vacancy when accounting for turnover, minor repairs between tenants, and occasional bad luck. Using 5% is optimistic even in strong markets.

First-time investors often estimate 20-25% operating expenses when 35-45% is realistic for most single-family rentals.

Don't forget: Property tax, insurance, maintenance, property management (even if you self-manage), and periodic large expenses like HVAC replacement, roof repairs, and water heaters.

A 6% cap rate in Austin isn't directly comparable to an 11% cap rate in Cleveland. You're comparing an appreciation market to a cash flow market—different strategies entirely.

Better approach: Compare properties within the same market and asset class. Compare Dallas single-family rentals to other Dallas single-family rentals, not to Cleveland multifamily properties.

A 15% cap rate sounds amazing until you discover the roof needs $25,000 in repairs, the neighborhood is declining, or tenants are unreliable.

Red flag check: If a cap rate is significantly above market average (3-4 percentage points higher), investigate carefully. High cap rates often signal high risk—deferred maintenance, challenging locations, or tenant problems.

Cap rate is one metric among many. It doesn't account for appreciation, tax benefits, mortgage terms, or renovation potential.

Complete analysis includes:

• Cap rate (property income yield)
• Cash-on-cash return (your actual cash returns after financing)
• Total return (income + appreciation)
• Tax implications (depreciation benefits)
• Exit strategy considerations

Cap rate works well for stabilized income properties, but it's misleading in certain scenarios:

If you're buying a distressed property to renovate and increase rents, current cap rate is nearly meaningless. Focus on projected cap rate after improvements.

Example: A rundown fourplex shows a 4% cap rate with below-market rents. After $60,000 in renovations and rent increases, it could stabilize at 9%. The purchase decision depends on the after-repair cap rate, not current performance.

Planning to flip in 12-18 months? Cap rate measures annual income, which isn't your strategy. Focus on purchase price, renovation costs, and expected sale price instead.

Cap rate ignores property value growth. A San Francisco rental with a 3% cap rate might dramatically outperform a Cleveland property with an 11% cap rate when you factor in 5% annual appreciation.

If you're living in part of a duplex or house-hacking, cap rate doesn't capture the full value since you're saving on housing costs personally.

Cap rate assumes current rents are market-rate. If rents are $400 below market, your true investment potential isn't reflected in current cap rate calculations.

Raise rents to market rate: If your rent is below market, even a $50-100/month increase improves your cap rate. On a $250,000 property, increasing rent from $1,800 to $1,900/month adds $1,200 annually, boosting cap rate by 0.48%.

Add value-add amenities: Installing washer/dryer, adding parking, upgrading appliances, or allowing pets (with pet rent) can justify rent increases without major renovations.

Reduce turnover: Long-term tenants mean less vacancy and lower turnover costs. Responsive maintenance and fair treatment keep good tenants longer.

Shop property insurance annually: Insurance rates vary significantly between providers. Getting three quotes annually can save $200-500/year.

Appeal property tax assessments: If comparable properties have lower assessments, file an appeal. Reducing your assessment by $20,000 might save $300-500 annually in property taxes.

Preventive maintenance: Spending $200 on annual HVAC maintenance prevents $3,000 emergency repairs. Regular inspections catch small problems before they become expensive disasters.

Efficient property management: Self-managing saves 8-10% of gross rent, but only if you have time and skills. Bad self-management costs more than professional help.

Price competitively: Asking $100/month above market to "maximize income" often backfires with extended vacancies. Two months vacant costs more than $1,200 in lost rent—a full year of that extra $100/month.

Screen tenants carefully: Quality tenants stay longer and cause fewer problems. Spending time on thorough screening reduces turnover.

Maintain the property well: Clean, well-maintained properties attract better tenants who stay longer and treat the property better.

Sometimes a low cap rate is perfectly fine:

• Appreciation markets: A 4% cap rate in Seattle is normal and doesn't need "improvement"—you're investing for value growth
• Personal use: House-hacking a duplex at a 3% cap rate is fine when you consider housing cost savings
• Short-term hold: Flipping a property in 12 months means cap rate is irrelevant

Focus on improving cap rate when you're holding for long-term cash flow. If appreciation or other factors drive your strategy, obsessing over cap rate optimization misses the point.

Cap rate is a valuable tool for comparing investment properties and evaluating income potential, but it's one metric among several you should consider before making investment decisions.

This calculator provides estimates based on the information you enter. Actual returns may vary due to unexpected expenses, market changes, tenant issues, or economic conditions. Always conduct thorough due diligence including property inspections, title review, market analysis, and neighborhood research before purchasing investment property.

Remember to consult with financial professionals, real estate advisors, and tax specialists when evaluating investment properties. Cap rate analysis is a starting point for your research, not a complete investment analysis.

Disclaimer: This calculator is for educational and informational purposes only. It does not constitute financial advice, investment advice, or recommendations to purchase any specific property. Real estate investing carries risks including loss of capital, unexpected expenses, and market volatility.