The cap rate is real estate's common language: the annual return a property would produce if bought entirely with cash, expressed as one comparable percentage. This calculator works two ways — directly from a known net operating income, or by building the NOI up from rent, vacancy, and itemized expenses.
The Formula
Direct mode: enter value and NOI. Build-up mode: enter annual rent and the expense picture — vacancy percentage, property tax, insurance, maintenance and management percentages, and HOA dues — and the engine constructs NOI for you:
Note the engine's conventions, because they are the professionally correct ones: maintenance and management percentages are calculated on the gross annual rent, vacancy loss comes off the top before expenses, and the result includes an expense ratio (operating expenses ÷ EGI) as a sanity check — most stabilized properties run 25–40%. The tool also plots the cap rate on a 0–12% benchmark scale.
Worked Examples
Build-up mode. A 48,000/year, with 5% vacancy, 1,800 insurance, maintenance at 5% of rent (3,840):
- EGI: 45,600**
- Operating expenses: 6,000 + 1,800 + 2,400 + 3,840 = $14,040 (expense ratio 30.8%)
- NOI: 14,040 = $31,560
- Cap rate: 31,560 ÷ 500,000 = 6.31%
Direct mode. A retail space at 96,000 NOI returns 8.00% — and invert it to see the other face of the metric: value ÷ NOI = 12.5, meaning the price equals 12.5 years of current NOI.
How to Read a Cap Rate
A cap rate fuses return and risk into one number, which is why prime properties in supply-starved cities trade at 3–5% (buyers accept thin current yield for safety and appreciation) while riskier markets and tired assets offer 8–10%+ (the yield is the compensation). Three disciplines keep the metric honest. NOI excludes debt service — cap rate is deliberately financing-blind, which makes properties comparable but means it is not your return once a mortgage exists; that levered figure is cash-on-cash return, and at rates above the cap rate leverage helps you, below it, it hurts. NOI excludes capital expenditure — a roof or HVAC replacement is not an operating expense, so a property can show a fine cap rate while quietly owing you $40,000; underwrite a capex reserve separately. In-place vs pro forma: sellers quote next year's hoped-for NOI; buyers should price this year's actual one and treat any gap as risk they are being asked to fund. Used that way — verified NOI, market-appropriate rate, capex reserved — the cap rate remains the fastest legitimate screen in property investing, and the valuation engine too: value = NOI ÷ market cap rate is how income property is actually priced.
Frequently Asked Questions
What is a good cap rate?
There is no universal good — there is only appropriate-for-the-risk. Compare against recent sales of similar properties in the same market: a cap rate meaningfully above the local norm signals either a bargain or a problem the NOI is hiding, and finding out which is the investor's job.
Why does the calculator ask for vacancy separately?
Because gross rent is a fantasy number — units sit empty between tenants. Effective gross income after a vacancy allowance (5% is a common stabilized assumption) is the income a buyer can actually underwrite, and expenses are then charged against reality.
Can a cap rate be negative or misleadingly high?
Yes to both. If operating expenses exceed effective income, NOI — and the cap rate — go negative, which the formula reports faithfully. And a temporarily inflated NOI (a seller deferring all maintenance for a year) produces a flattering rate on a deteriorating asset, which is why the expense ratio check matters.