Cap Rate Calculator
Capitalization rate and cash flow for a rental property.
Input sheet
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Cap rate is the one number rental investors quote at each other: the property's annual operating income as a percentage of its price, before any mortgage. It's how you compare a duplex in one town against a condo in another on equal footing.
How it works
Cap rate = net operating income ÷ purchase price × 100, where NOI is annual rent minus operating expenses (taxes, insurance, maintenance, vacancy — not the mortgage).
Net operating income (NOI) is the annual rent minus operating expenses — property tax, insurance, maintenance, management, and a vacancy allowance. The mortgage is deliberately excluded: cap rate measures the property's own earning power, independent of how any particular buyer finances it.
The monthly cash-flow metric shown here is rent minus the expenses you entered — add your actual mortgage payment on top to see your levered cash flow. A property can have a healthy cap rate and still run cash-negative with heavy financing.
NOI = (monthly rent − monthly operating expenses) × 12. Cap rate = NOI ÷ purchase price × 100.
Worked examples
A $300,000 rental bringing $2,200/month with $800/month in expenses. → 5.60% cap rate — $16,800 NOI.
(2,200 − 800) × 12 = $16,800; ÷ 300,000 = 5.6%.
A $200,000 property renting at $1,800 with $700 in expenses. → 6.60% cap rate.
(1,800 − 700) × 12 = $13,200 ÷ 200,000 = 6.6%.
Tips & gotchas
- Underwrite with a vacancy allowance (5–8% of rent) and a maintenance reserve even if the seller's numbers show none — 'pro forma' listings routinely omit both.
- Compare cap rates only within similar markets and property classes; a 5% in a stable suburb and a 9% in a declining one price different risks, not a better deal.
- Cap rate also works backwards: divide a property's NOI by the market's typical cap rate to estimate what it's worth.
FAQ
What's a good cap rate?
4–7% is common for stable residential markets; higher usually signals more risk (location, condition, tenant turnover), not free money.
Why exclude the mortgage?
Financing varies by buyer; the property's income doesn't. Excluding debt lets two investors with different loans agree on what the asset itself yields. Levered return is a separate calculation (cash-on-cash).
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