Cap Rate
Calculator

The capitalization rate is net operating income divided by property price, expressed as a percentage. It estimates the unleveraged annual return a property would generate if bought in cash, letting you compare properties independent of financing.

Cap rate deliberately ignores financing because it measures the property's own earning power, not your personal deal structure. Adding a loan changes your cash-on-cash return but not the underlying cap rate, which is why it's used to compare properties on equal footing.

NOI is rental income minus operating expenses — property taxes, insurance, maintenance, property management, and vacancy allowance — but before mortgage payments, depreciation, or income taxes. Leaving out debt service is what makes it comparable across differently financed properties.

Not necessarily. Higher cap rates often reflect higher perceived risk — older buildings, weaker neighborhoods, or unstable tenants — while lower cap rates are typical in stable, desirable markets. Compare cap rates to similar properties in the same area rather than treating a single number as universally good or bad.

Vacancy directly reduces effective rental income, which lowers NOI. Because cap rate is NOI divided by price, any change to income or expenses that shifts NOI moves the cap rate proportionally, even if the purchase price stays the same.