Cap Rate Calculator

Formula

Cap rate = annual net operating income ÷ current property value × 100%.

Worked example

With Annual net operating income: 18000 currency units, Property value: 300000 currency units, capitalization rate is 6 %.

Inputs and calculation

Start with a consistent annual net operating income after ordinary property operating expenses. Divide that income by the price or value of the property being evaluated. The displayed relationship is Cap rate = annual net operating income ÷ current property value × 100%. Keep the fields' displayed units attached when reproducing this relationship by hand.

Worked numerical example

For example, enter annual net operating income 18,000 currency units, property value 300,000 currency units. Those inputs produce capitalization rate of 6 %.

Holding the other example values fixed, change annual net operating income from 18,000 to 19,800 currency units. The main output becomes 6.6 %. This comparison isolates the effect of that one input.

How to read and use the result

The percentage is an unlevered income-to-value ratio. It is neither a mortgage return nor a guaranteed investor yield, and a higher figure can accompany higher risk. Compare the income pricing of similar rental properties after preparing a defensible NOI.

Practical context

An investment property with 18,000 of annual NOI and a 300,000 value has a 6% capitalization rate. NOI starts with rental income and removes normal operating costs before financing; a mortgage payment must not be deducted when comparing properties on an unlevered basis. A property offered at the same price with a higher stated NOI may have optimistic vacancy or repair assumptions.

Assumptions and scope

The NOI and property value represent the same stabilized property condition. Financing, income taxes, major capital replacements and sale proceeds are outside this one-year ratio. Replace the example defaults with measured inputs for your situation and account separately for factors outside these fields.

Checks and common mistakes

Do not use gross rent in place of NOI. Vacancy, management, maintenance, insurance and property expenses can materially shrink the numerator.

Common questions

What should I verify before using the Cap Rate Calculator result?

Review leases, expenses and replacement reserves before interpreting the rate, and compare properties with similar location and risk. A low cap rate may reflect strong expected income growth, a safer location or simply an expensive asking price. A high one can reflect weak occupancy, deferred maintenance or an optimistic NOI. Investigate those drivers instead of ranking properties by this percentage alone.

Sources and references

• Freddie Mac: Capitalization rate guidance