Cap Rate Calculator
Calculate capitalization rate for investment properties. Compare cap rates across properties, determine property value from NOI, and understand real estate investment returns.
What do you want to calculate?
Calculate NOI from Rent (Optional)
About This Calculator
The capitalization rate (cap rate) is one of the most important metrics in real estate investing. It measures the rate of return on an investment property based on the income the property generates, regardless of how the purchase is financed. Cap rate provides a standardized way to compare different properties and evaluate whether a property is priced fairly relative to its income potential.
The Cap Rate Formula: Cap Rate = Net Operating Income (NOI) / Property Value × 100
What Cap Rate Tells You:
- The unlevered return on a property investment
- How the property compares to similar properties in the market
- Whether a property is potentially overpriced or underpriced
- The risk profile of the investment (higher cap rate = higher risk/reward)
Using Cap Rate:
- Calculate cap rate from known NOI and price
- Determine property value from NOI and target cap rate
- Find required NOI to achieve target return at a given price
Important Limitations:
- Does not account for financing (debt)
- Does not include appreciation or depreciation
- Should only compare within same property type and market
- NOI estimates can vary significantly
This calculator helps analyze cap rates for investment properties. For leveraged returns, see our Cash-on-Cash Calculator. For rental analysis, visit our Rental Property Calculator.
How to Use the Cap Rate Calculator
- 1Select what you want to calculate: cap rate, property value, or required NOI.
- 2Enter the known values (two of three: property value, cap rate, NOI).
- 3Select property type for market comparison benchmarks.
- 4Optionally enter gross rent, expenses, and vacancy to calculate NOI automatically.
- 5Review the calculated result and market comparison.
- 6Compare property values at different cap rates.
- 7Use benchmarks to assess if the property is fairly priced.
- 8Consider cash-on-cash return if using financing.
- 9Factor in appreciation potential beyond cap rate.
- 10Compare multiple properties using consistent assumptions.
Understanding Cap Rate
The fundamentals of capitalization rate.
The Formula
Cap Rate = NOI / Property Value × 100
Or rearranged:
- Property Value = NOI / Cap Rate
- NOI = Property Value × Cap Rate
Example Calculation
Property Details:
- Purchase Price: $500,000
- Gross Rent: $60,000/year
- Operating Expenses: $24,000/year
- NOI: $36,000/year
Cap Rate: $36,000 / $500,000 = 7.2%
What NOI Includes
Income:
- Base rent
- Percentage rent (retail)
- Parking income
- Laundry/vending
- Other income
Expenses (Subtracted):
- Property taxes
- Insurance
- Utilities (if owner-paid)
- Property management
- Maintenance/repairs
- Reserves
NOT Included in NOI:
- Mortgage payments (principal & interest)
- Depreciation
- Capital expenditures
- Income taxes
Cap Rate Benchmarks by Property Type
Typical cap rates vary significantly by property type and market.
Current Market Cap Rates (2024)
| Property Type | Low (Class A) | Mid | High (Class C) |
|---|---|---|---|
| Multifamily | 4.0-5.0% | 5.0-6.0% | 6.0-8.0% |
| Industrial | 4.5-5.5% | 5.5-6.5% | 6.5-8.0% |
| Retail (NNN) | 5.0-6.0% | 6.0-7.0% | 7.0-9.0% |
| Office | 5.5-6.5% | 6.5-8.0% | 8.0-10.0% |
| Self-Storage | 5.0-6.0% | 6.0-7.0% | 7.0-8.5% |
| Hotels | 7.0-8.5% | 8.5-10.0% | 10.0-12.0% |
Factors Affecting Cap Rate
Lower Cap Rates (Premium):
- Prime locations
- Strong tenant credit
- Long lease terms
- New construction
- Low vacancy markets
- Institutional quality
Higher Cap Rates:
- Secondary/tertiary markets
- Older buildings
- Short lease terms
- Higher vacancy
- Value-add opportunities
- Management-intensive
Geographic Variation
| Market | Typical Multifamily Cap |
|---|---|
| San Francisco | 4.0-4.5% |
| New York | 4.5-5.0% |
| Los Angeles | 4.5-5.0% |
| Austin | 5.0-5.5% |
| Denver | 5.0-5.5% |
| Phoenix | 5.5-6.0% |
| Atlanta | 5.5-6.5% |
| Cleveland | 7.0-8.0% |
Cap Rate vs. Other Metrics
How cap rate relates to other investment measures.
Cap Rate vs. Cash-on-Cash Return
| Metric | What It Measures | Includes Debt? |
|---|---|---|
| Cap Rate | Unlevered return | No |
| Cash-on-Cash | Return on equity | Yes |
Example:
- Property: $500,000
- NOI: $35,000
- Cap Rate: 7%
- Down Payment: $100,000
- Debt Service: $24,000/year
- Cash Flow: $11,000
- Cash-on-Cash: 11%
Cap Rate vs. IRR
Cap Rate:
- Point-in-time measure
- Doesn't include appreciation
- Doesn't account for exit
IRR (Internal Rate of Return):
- Includes all cash flows
- Accounts for appreciation
- Includes sale proceeds
- Time-weighted return
Cap Rate vs. GRM
| Metric | Formula | Use Case |
|---|---|---|
| Cap Rate | NOI / Price | Income after expenses |
| GRM | Price / Gross Rent | Quick comparison |
GRM is simpler but less accurate because it ignores expenses.
When to Use Each
Cap Rate:
- Comparing similar properties
- Valuing income properties
- Market analysis
Cash-on-Cash:
- Evaluating leveraged investments
- Comparing financing options
- Measuring actual equity return
IRR:
- Full investment analysis
- Comparing different hold periods
- Including appreciation assumptions
Using Cap Rate for Valuation
Determining property value from NOI and market cap rate.
The Income Approach
Value = NOI / Cap Rate
This is the direct capitalization method, one of the primary approaches to valuing income-producing property.
Step-by-Step Valuation
1. Determine Stabilized NOI
- Review actual income/expenses
- Adjust for market rents
- Normalize expenses
- Account for vacancy
2. Select Appropriate Cap Rate
- Research comparable sales
- Consider property quality
- Factor in location
- Assess tenant quality
3. Calculate Value
Example:
- Stabilized NOI: $75,000
- Market Cap Rate: 6.5%
- Value: $75,000 / 0.065 = $1,153,846
Common Mistakes
Overvaluing:
- Using below-market cap rate
- Overstating NOI
- Ignoring deferred maintenance
- Not accounting for lease roll risk
Undervaluing:
- Using too high cap rate
- Understating potential rents
- Ignoring value-add potential
- Not considering location premiums
Sensitivity Analysis
$75,000 NOI:
| Cap Rate | Value |
|---|---|
| 5.5% | $1,363,636 |
| 6.0% | $1,250,000 |
| 6.5% | $1,153,846 |
| 7.0% | $1,071,429 |
| 7.5% | $1,000,000 |
A 1% change in cap rate = ~15% change in value!
Cap Rate Compression and Expansion
Understanding cap rate movements and their impact.
What Moves Cap Rates
Cap Rate Compression (Lower)
Causes:
- Interest rates declining
- Capital flooding into real estate
- Strong economic growth
- Tight supply
- Institutional demand
Effect:
- Property values increase
- Same NOI worth more
- Seller's market
Cap Rate Expansion (Higher)
Causes:
- Interest rates rising
- Economic uncertainty
- Oversupply
- Credit tightening
- Risk aversion
Effect:
- Property values decrease
- Same NOI worth less
- Buyer's market
Historical Context
| Period | 10-Year Treasury | Multifamily Cap |
|---|---|---|
| 2010 | 3.2% | 7.0% |
| 2015 | 2.2% | 5.5% |
| 2020 | 0.9% | 5.0% |
| 2022 | 2.0% | 4.5% |
| 2024 | 4.5% | 5.5% |
Cap Rate Spread
Spread = Cap Rate - Risk-Free Rate
Investors require a premium over risk-free returns:
- Typical spread: 200-400 basis points
- Higher spreads indicate more risk perception
- Compressed spreads may signal overheating
Implications for Investors
Rising Rates:
- Cap rates likely to expand
- Hold long-term or lock in fixed debt
- Focus on NOI growth properties
Stable/Falling Rates:
- Cap rates may compress
- Potential for appreciation
- Can pay higher prices for quality
Common Cap Rate Mistakes
Avoid these errors when using cap rates.
Mistake 1: Comparing Apples to Oranges
Wrong:
- Comparing office cap rate to multifamily
- Comparing Class A to Class C
- Comparing different markets
Right:
- Compare same property type
- Compare similar quality/age
- Compare same market/submarket
Mistake 2: Using Pro Forma NOI
Wrong:
- Using seller's optimistic projections
- Assuming full occupancy
- Ignoring expense increases
Right:
- Use actual trailing 12-month NOI
- Verify with tax returns
- Normalize one-time items
Mistake 3: Ignoring Cap Rate Drivers
Key Questions:
- Why is this cap rate higher/lower than market?
- What risks does the cap rate reflect?
- Is the NOI sustainable?
Mistake 4: Forgetting Financing
Remember:
- Cap rate is unlevered
- Your actual return depends on financing
- Calculate cash-on-cash for full picture
Mistake 5: Static Analysis
Consider:
- NOI growth potential
- Cap rate trends
- Hold period
- Exit cap rate assumptions
Best Practices
- Verify NOI with documentation
- Research comparable cap rates
- Adjust for property-specific factors
- Consider multiple scenarios
- Use cap rate as ONE tool, not the only tool
Pro Tips
- 💡Always verify NOI with actual financial statements, not just pro forma.
- 💡Compare cap rates only within the same property type and market.
- 💡Use cap rate as one tool among many - not the only decision factor.
- 💡Consider both current cap rate and potential for NOI growth.
- 💡Factor in exit cap rate when projecting returns over your hold period.
- 💡Lower cap rate properties may be appropriate for capital preservation.
- 💡Higher cap rates may indicate opportunity or risk - investigate why.
- 💡Calculate cash-on-cash return to understand actual leveraged returns.
- 💡Watch for cap rate manipulation through understated expenses.
- 💡Consider the spread to risk-free rates when evaluating market conditions.
- 💡Property condition can significantly impact sustainable NOI.
- 💡Lease terms and tenant quality affect risk beyond the cap rate number.
Frequently Asked Questions
A "good" cap rate depends on property type, location, and your goals. Generally, 5-7% is considered average for most markets. Higher cap rates (7-10%+) indicate higher risk/reward opportunities, while lower cap rates (4-5%) typically indicate premium, lower-risk properties. Compare to similar properties in the same market.
