Cap Rate Calculator

A 'good' cap rate depends heavily on your market and investment goals. As a general benchmark: urban and trophy properties in major cities typically trade at 3–4% cap rates due to strong demand and low perceived risk; suburban markets typically range from 5–7%; rural or secondary markets often see 7–10% or higher. Investors seeking stable, lower-risk assets often accept lower cap rates in exchange for stronger appreciation potential and tenant quality. Investors targeting income yield or value-add opportunities typically look for cap rates of 6–8% or higher. The key is comparing your cap rate against similar properties in the same market — a 5% cap rate is excellent in San Francisco but below average in rural Ohio.

Cap rate and cash-on-cash return both measure investment performance, but they answer different questions. Cap rate measures the property's income yield before any financing — it is calculated as NOI divided by property value, completely ignoring mortgages. This makes it useful for comparing properties on an equal footing regardless of how they are financed. Cash-on-cash return, by contrast, measures the actual cash yield on your personal invested capital after accounting for debt service. It divides annual pre-tax cash flow (NOI minus mortgage payments) by total cash invested (down payment plus closing costs plus rehab). Two investors buying the same property with different amounts of leverage will see the same cap rate but very different cash-on-cash returns.

No. Cap rate is explicitly calculated before any debt service. Net Operating Income (NOI) — the numerator in the cap rate formula — excludes all financing costs. This is one of cap rate's most important features: it allows investors, appraisers, and lenders to compare properties on a financing-agnostic basis. Whether you buy a property with all cash or with 80% leverage, the cap rate is the same. This is why commercial lenders use cap rate to evaluate a property's ability to support a loan, independent of any specific buyer's financing structure.

Net Operating Income (NOI) is calculated as Effective Gross Income minus all operating expenses. Operating expenses include: property taxes, property insurance (hazard and landlord liability), maintenance and repairs (commonly estimated at 1% of property value per year), property management fees (typically 8–10% of collected rent), HOA dues, landscaping, utilities paid by the landlord, advertising and leasing commissions, and other recurring property costs. Notably excluded from operating expenses — and therefore from the NOI calculation — are mortgage principal and interest payments, depreciation, income taxes, and capital expenditures. Including debt service would make NOI financing-dependent, which defeats its purpose as a property-level performance metric.

The relationship between cap rate, NOI, and property value can be rearranged to solve for any of the three variables. If you know the NOI and your required cap rate, the implied property value is: Value = NOI ÷ Cap Rate. For example, if a property generates $36,000 in annual NOI and your target cap rate is 6%, the implied value is $36,000 ÷ 0.06 = $600,000. This is the maximum you should pay to achieve a 6% cap rate. If the asking price is $700,000, your actual cap rate would be $36,000 ÷ $700,000 = 5.14% — below your target. This approach is widely used by commercial brokers, appraisers, and investors to quickly assess whether an asking price is reasonable for a given income stream.

A higher cap rate means you are getting more income relative to the property's price — you are buying more cheaply relative to the income stream. A lower cap rate means you are paying more for each dollar of income — typically because the market perceives the asset as safer, higher quality, or in a high-demand location. Whether higher or lower is 'better' depends on your goals. Income-focused investors seeking maximum cash yield prefer higher cap rates. Appreciation-focused investors in prime markets may accept lower cap rates in exchange for stronger property value growth and tenant stability. In general, higher cap rates come with higher risk (less desirable location, older property, higher vacancy) and lower cap rates reflect lower risk and stronger market fundamentals.