Cap Rate Calculator for Rental Property
Cap rate is a property's net operating income divided by its price: a duplex with $19,470 of NOI priced at $300,000 has a 6.49% cap rate. Enter the NOI and price and this calculator gives the cap rate. The answer is only as good as the NOI, which comes from income and expense figures your bookkeeping for rental properties should already track.
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How to use the cap rate calculator
Enter two numbers:
- Net operating income (NOI): yearly rent and other income, minus vacancy and operating costs. If you don’t have it yet, work it out first with the NOI calculator.
- Price: the asking price, your offer, or the current value of a property you own.
The calculator gives the cap rate.
The cap rate formula
- Cap rate = NOI / price x 100
- Price at a target cap rate = NOI / target cap rate
- NOI needed at a price = price x target cap rate
The second form is the one to use when you’re deciding what to offer.
A worked cap rate example
A duplex in a Midwest city is listed at $300,000. Each unit rents for $1,250, with $600 a year of pet rent.
- Gross income: $30,600
- Less 5% vacancy: $29,070
- Operating costs (tax, insurance, repairs, water and trash, lawn and snow): $9,600
- NOI: $19,470
- Cap rate: $19,470 / $300,000 = 6.49%
Now say similar duplexes nearby have sold at around a 7% cap rate. The price that gives you 7% is $19,470 / 0.07 = about $278,140. That’s a fair starting point for an offer, unless something about this duplex justifies a lower cap rate.
Going the other way: at a 5.5% cap rate, the same NOI supports a price of about $354,000. A one-point change in cap rate moves the value by tens of thousands of dollars, which is why the NOI has to be right.
What a good cap rate looks like for a small landlord
Start with your mortgage rate. If you’d borrow at 7% and the cap rate is 6.49%, every borrowed dollar costs more than the property earns on it, so your cash flow will be thin unless you put more down. That’s the situation many small landlords have faced since rates rose. A cap rate above your borrowing cost means the loan works in your favor.
Then compare with local sales. Cap rates in the same city vary by neighborhood, building age and condition, and they shift with interest rates. A property priced at a much lower cap rate than its neighbors needs a reason, such as rents well below market that you can raise.
Limits and caveats
- Check the seller’s NOI. Listings often leave out vacancy, management or a realistic repair budget, and may show last year’s insurance and tax bills. Recalculate with your own figures.
- Property tax can reset after a sale. In many states, the purchase price becomes the new assessed value.
- One year only. Cap rate doesn’t show rent growth, appreciation or a big repair coming in three years.
- No financing. Cap rate tells you nothing about cash flow on your loan. Run cash-on-cash return next.
- Small properties are noisy. On a single-family home, one vacancy or one repair can move the real cap rate a full point in a year.
Questions landlords ask
The questions we get most, each answered in a paragraph.
What is a good cap rate for a rental property?
There's no single good number. Cap rates depend on the market, the property type and the risk. Compare a property's cap rate with recent sales of similar buildings nearby and with your mortgage rate. If the cap rate is above the rate you'd borrow at, the loan helps your return; if it's below, borrowing hurts it.
How do you calculate cap rate?
Divide net operating income by the purchase price and multiply by 100. NOI is a year's rent and other income, minus vacancy and operating expenses such as property tax, insurance, repairs and management. It does not subtract mortgage payments or depreciation. $19,470 of NOI on a $300,000 property is a 6.49% cap rate.
Is a higher cap rate better?
For a buyer, a higher cap rate means more income for each dollar of price, which is better if everything else is equal. But higher cap rates often come with more risk: older buildings, weaker rent growth or higher vacancy. A lower cap rate in a stable, growing area can be a better long-term buy.
Does cap rate include the mortgage?
No. Cap rate measures the property's income relative to its price as if you'd paid cash. To see the effect of your loan, use cash-on-cash return, which divides cash flow after the mortgage by the cash you invested.