Cap Rate Calculator
Calculate capitalization rate, property value, or net operating income for any real estate investment.
Income & Expenses
Results
Capitalization Rate
4.65%
Typical for Class A / major metro
Net Operating Income
$23,228
Effective Gross Income
$34,200
Total Expenses
$10,972
Expense Ratio
32.08%
Cap Rate Sensitivity
A 1% change in cap rate = $107,629 change in property value
Income Breakdown
Expense & Vacancy Breakdown
Guide
How it works
The capitalization rate — universally shortened to "cap rate" — is the foundational metric of commercial and residential income real estate. Unlike equity returns that depend on how much leverage you used, the cap rate measures the unlevered return on an asset: what the property would yield if purchased entirely in cash. Two investors buying the same building at different loan-to-value ratios will see the same cap rate, but very different cash-on-cash returns. This makes cap rate uniquely useful for comparing properties across markets and asset classes, independent of each buyer's financing structure.
Cap rates vary dramatically by geography. In New York City and San Francisco, institutional-quality multifamily trades at 3–4% cap rates, reflecting the market's expectation of long-term rent growth and liquidity. In secondary Midwest cities — Cleveland, Indianapolis, Kansas City — similar-quality assets may trade at 7–10% because demand is lower, growth expectations are more modest, and investors require higher income yields to accept the risk. This inverse relationship means a NYC building may be priced at 25× NOI while a Midwest equivalent trades at 10–12× NOI.
Cap rate and value move in opposite directions. When cap rates compress (fall), values rise — the market is willing to pay more per dollar of NOI. When cap rates expand (rise), values fall. This is why rising interest rates put downward pressure on real estate prices: as the risk-free rate on 10-year Treasury bonds climbs, real estate must offer a competitive spread — historically 100 to 200 basis points above the 10-year — or prices must adjust downward to restore that premium. The 2022–2024 rate cycle illustrated this painfully for many leveraged buyers.
Cap rate vs. cash-on-cash return: Cash-on-cash return measures actual dollars of annual pre-tax cash flow against the cash invested (down payment + closing costs + renovation). It accounts for financing costs — mortgage payments — that cap rate deliberately ignores. A property with a 6% cap rate might produce a 10% cash-on-cash return with favorable leverage, or only 3% with a high-rate mortgage. Cash-on-cash is what you actually put in your pocket; cap rate is what the asset inherently earns.
Going-in vs. stabilized cap rate: When evaluating a value-add property — one with below-market rents, high vacancy, or deferred maintenance — brokers often present both a going-in cap rate (based on current NOI) and a "stabilized" or pro-forma cap rate (based on projected NOI after improvements). The gap between these figures is where value-add deals are won or lost. Underwrite stabilized assumptions conservatively; assume renovation costs 20–30% higher than initial quotes and lease-up takes twice as long as projected.
NOI calculation pitfalls: Sophisticated buyers always include vacancy in NOI calculations — typically 5–10% of gross potential rent. Sellers and inexperienced brokers sometimes present NOI based on 100% occupancy, which overstates income and understates the true cap rate. Equally common is omitting replacement reserves — a capital expenditure allocation for major systems like roofs, HVAC, and plumbing. A proper NOI excludes debt service and income taxes but includes management fees even if self-managed (because you could hire out), realistic maintenance, and adequate vacancy.
Property class and cap rate ranges: Class A properties (new construction, premium locations, institutional tenants) trade at 4–5% in most markets. Class B (aging but well-maintained, good locations) typically 5–7%. Class C (older, workforce housing, secondary locations) often 7–10%+. The higher cap rate reflects higher risk: more deferred maintenance, more tenant turnover, greater sensitivity to economic downturns. The "right" cap rate for your purchase depends entirely on your risk tolerance, hold period, and ability to execute on any business plan.
1031 exchange and cap rate strategy: When selling an appreciated property and executing a 1031 exchange to defer capital gains taxes, investors frequently trade into a higher-value property with a lower cap rate. A long-held Midwest asset at an 8% cap rate might be exchanged into a coastal multifamily at 4.5% — accepting lower current yield in exchange for a more liquid, appreciating asset and the ability to compound gains tax-deferred. The cap rate at exit is as important as the cap rate at acquisition; buying at a 7% cap and selling at a 6% cap (cap rate compression) delivers a significant windfall beyond operating cash flow.
What is a good cap rate for rental property?expand_more
A 'good' cap rate depends entirely on market, asset class, and your investment goals. In major coastal markets (NYC, SF, LA), 3–4% is typical for Class A properties — investors accept low current yield expecting appreciation. In secondary and tertiary markets, 7–10% is common. Most individual investors targeting cash flow look for 5–7% as a balanced range. Avoid chasing high cap rates (10%+) without understanding why they're elevated — it usually signals higher risk, deferred maintenance, or a weak rental market.
How does cap rate differ from cash-on-cash return?expand_more
Cap rate is calculated before financing — it's what you'd earn if you paid all cash. Cash-on-cash return accounts for your actual mortgage payments and measures real cash flow against your cash invested. A property with a 6% cap rate and a 7.5% mortgage might produce a negative cash-on-cash return. Conversely, in a low-rate environment, the same property could yield 9% cash-on-cash with leverage. Use cap rate to compare properties; use cash-on-cash to evaluate whether a specific deal works given your financing.
Why do cap rates vary so much by city?expand_more
Cap rates reflect local supply/demand dynamics, rent growth expectations, liquidity, and risk perception. High-demand coastal markets with tight supply, strong job markets, and deep investor pools command premium prices and thus low cap rates — investors accept 3–4% because they expect rents and values to grow. Slower-growth markets offer less price appreciation upside, so buyers demand higher income yields to compensate. Regulatory environments matter too: markets with strong tenant protections can pressure cap rates upward due to perceived operational risk.
Does cap rate include mortgage payments?expand_more
No — cap rate deliberately excludes debt service. This is one of its most useful features: it lets you evaluate a property's intrinsic income-generating ability regardless of how it's financed. Two investors buying the same property with 20% down vs. 50% down will see the same cap rate but very different cash-on-cash returns. To understand your actual cash flow after mortgage payments, calculate cash-on-cash return using Net Cash Flow (NOI minus annual debt service) divided by total cash invested.
How do rising interest rates affect cap rates?expand_more
Rising interest rates typically push cap rates upward (and property values downward) through two mechanisms. First, real estate must compete with higher-yielding risk-free alternatives like Treasury bonds — if the 10-year yield rises from 2% to 5%, a 4% cap rate property looks far less attractive. Second, higher borrowing costs reduce what leveraged buyers can afford to pay. The 'cap rate spread' over the 10-year Treasury has historically been 100–200 basis points; when that spread compresses too far, cap rate expansion (and price correction) typically follows.
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