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Estimate your property’s cap rate by entering the purchase price, monthly rent, and operating expenses below. Instantly see your net operating income and the rate of return on your investment.
The cap rate is a real estate investing metric that measures the expected rate of return on an investment property, based solely on the property's income-producing potential.
Expressed as a percentage, the cap rate helps investors evaluate how profitable a property might be relative to its purchase price.
You can calculate the cap rate of a real estate property by dividing the net operating income (NOI) by the property value.
The formula is simple:
Cap Rate = Net Operating Income (NOI) / Property Value
To calculate the cap rate manually, you need two primary pieces of data:
• Net Operating Income (NOI): The property’s total income minus operating expenses (excluding mortgage payments)
• Property Value or Purchase Price: The current market value or what you plan to pay for the property
Let’s say:
• Monthly rent: $2,000
• Annual rental income: $24,000
• Operating expenses: $6,000/year
• NOI: $24,000 - $6,000 = $18,000
• Property purchase price: $300,000
Cap Rate = 18,000 / 300,000 = 0.06 or 6%
This tells you that, based on income and operating expenses, you can expect a 6% return on your investment.
Cap rate is a foundational concept in investment property analysis because it offers a snapshot of potential profitability.
It allows investors to:
• Compare properties quickly, regardless of size or location
• Assess risk: Lower cap rates often indicate lower risk (e.g., in more stable markets), while higher cap rates can mean higher risk or undervalued opportunities
• Make data-driven decisions without relying solely on intuition or speculation
Using a cap rate calculator eliminates guesswork and ensures you're analyzing properties with precision.
Cap Rate = Net Operating Income (NOI) / Property Value
Net Operating Income is $20,000 and it’s valued at $250,000
Cap Rate = 20,000 / 250,000
Cap Rate = 0.08 or 8%
While the cap rate is powerful, it’s not a magic number. Here are a few pitfalls to avoid:
• Ignoring other metrics: Cap rate doesn’t account for financing, taxes, or future appreciation. Always use it alongside other tools like cash-on-cash return and ROI.
• Relying on unrealistic estimates: Overestimating rent or underestimating expenses can skew results.
• Using gross income instead of NOI: Always subtract operating expenses to get accurate numbers.
• Comparing across markets blindly: A 6% cap rate in Manhattan is very different from 6% in a rural area.
Our cap rate calculator helps mitigate some of these errors by focusing on clean, accurate inputs.
Cap Rate measures a property's return based on its net operating income divided by its purchase price or market value. It does not factor in financing, making it useful for evaluating a property’s income potential on its own.
ROI (Return on Investment) looks at the total return, including appreciation, cash flow, and debt paydown. It does consider financing and is best for assessing long-term investment performance.
Cash-on-Cash Return focuses specifically on the return generated from the actual cash you invested. It does factor in leverage and is ideal for understanding how financing affects short-term cash flow.
Use cap rate to screen potential deals quickly. Then use cash-on-cash return and ROI to dive deeper and evaluate how financing and long-term gains affect your returns.
Want to skip manual math? Try our Free Cap Rate Calculator above. It’s designed for real estate investors who need quick, accurate insights.
The calculator instantly shows the cap rate. It’s fast, free, and designed to help you screen deals or compare multiple properties side-by-side.
1. Enter the property value or purchase price
2. Add your expected rental income (monthly or yearly)
3. Input estimated operating expenses including property taxes and estimated maintenance fees.
Note: The more accurate the expenses you enter the more accurate the Cap Rate you can calculate.
There’s no universal "perfect" cap rate—it depends on your investment strategy and the market you’re in.
However, here are some general guidelines:
• 4%–6%: Common in stable urban markets with lower risk
• 6%–8%: Balanced investments in mid-tier cities or suburbs
• 8%–10%+: Often found in up-and-coming or high-risk areas
A higher cap rate usually suggests higher potential returns but may come with greater risks, such as vacancies, neighborhood issues, or maintenance needs. Meanwhile, lower cap rates may offer long-term stability and appreciation.
Tip: Always compare cap rates within the same city or neighborhood, as local market dynamics vary.
The capitalization rate (cap rate) is a widely used metric in real estate for evaluating investment performance and estimating property value. Below are several of the key ways cap rates can be used by real estate investors.
Cap rate can help determine a property's market value based on its income potential. For example, if a rental property generates $33,600 in annual net income and the local average cap rate is 9.7%, the estimated value would be:
Value = $33,600 / 0.097 = $346,392
This provides a reliable starting point for pricing, especially when comparable sales data is limited.
Cap rate provides a simple, apples-to-apples comparison between different rental properties, regardless of price or location.
For example, if one property has a cap rate of 6% and another has a cap rate of 4%, the first one may offer better potential returns — assuming other risk factors are equal. This makes cap rate a useful tool for quickly screening and prioritizing potential investments.
Cap rate can also serve as a proxy for risk. Lower cap rates are typically found in more stable, high-demand markets (like major cities), where properties are considered safer investments.
Higher cap rates are often associated with areas or property types that have greater income variability or market uncertainty.
Investors looking for stable, long-term cash flow may prefer lower cap rates, while those seeking higher returns — and willing to take on more risk — may opt for higher cap rate properties.
Cap rate reflects the expected annual return on an all-cash purchase. A 10% cap rate, for instance, means investors expect to earn 10% of the property's value each year:
Cap Rate = Net Operating Income / Property Value
$12,000 / $120,000 = 10%
This makes it a useful tool for comparing the potential profitability of different properties.
Changes in rental income directly influence a property’s value if the cap rate remains constant. Increasing annual net income from $12,000 to $15,000 at a 10% cap rate increases the property's value from $120,000 to $150,000. Boosting rental income through upgrades or short-term rentals can significantly enhance valuation.
Cap rates are sensitive to macroeconomic trends, particularly interest rates. When rates rise, cap rates typically increase, which reduces property values.
For instance, a shift from a 10% to a 12% cap rate (with the same $12,000 income) lowers the property value to $100,000. Conversely, falling interest rates lead to lower cap rates and higher property values, even if income remains unchanged.
Quick answers to common questions about capitalization rates and how they impact real estate investments.
No, cap rate calculations do not include mortgage payments. It’s based solely on net operating income and property value, which allows for an unbiased comparison of properties regardless of financing.
Yes, a cap rate can be negative if the property's operating expenses exceed its rental income, indicating a loss.
Not necessarily. While a higher cap rate can mean higher returns, it may also signal higher risk or issues with the property or neighborhood.
Cap rate is more accurate for long-term rental properties. For short-term rentals, consider metrics like occupancy rates and seasonal income variation.
Recalculate cap rate anytime there’s a significant change in rental income, expenses, or property value—especially before renewing leases or refinancing.
Top tip: Use cap rate to screen properties, and then dive deeper with ROI and cash-on-cash return before purchasing.
The cap rate is a cornerstone of smart rental property ROI evaluation. It’s fast, effective, and gives you an objective view of a property’s income-generating potential.
In order to leverage Cap Rate effectively though, you need accurate financial data. Which is where software like Landlord Studio comes in. Keep accurate, up to date financial records without the stress with rental property accounting tools designed for you.
