ReturnLab
Cap Rate Calculator
Compare rental properties on an apples-to-apples basis, independent of how each one is financed.
Cap rate by net operating income and property value
Capitalisation rate is annual net operating income divided by the property's value. NOI is rent after operating expenses but before mortgage payments and income tax.
| Net operating income | Property value | Cap rate |
|---|---|---|
| $12,000 | $300,000 | 4.00% |
| $15,000 | $300,000 | 5.00% |
| $18,000 | $300,000 | 6.00% |
| $21,000 | $300,000 | 7.00% |
| $24,000 | $300,000 | 8.00% |
| $30,000 | $500,000 | 6.00% |
| $40,000 | $500,000 | 8.00% |
| $50,000 | $500,000 | 10.00% |
Cap rate deliberately excludes financing, so it measures the property rather than your deal - two buyers with different mortgages get the same cap rate on the same building. That makes it useful for comparing properties and useless for judging your own cash-on-cash return. What counts as a good rate is entirely local: prime property in an expensive city may trade at 4% because buyers expect appreciation, while 9% in a weak market can signal vacancy risk or deferred maintenance rather than a bargain. Be strict about NOI - include vacancy allowance, management, insurance, tax and repairs, or the rate flatters the property.
Why cap rate ignores your mortgage
Cap rate is calculated on the full property value, not your down payment or loan balance — that's deliberate, so you can compare an all-cash deal against a leveraged one on equal footing.
What's a 'good' cap rate?
It depends heavily on location and risk: stable markets often see 4-6% cap rates, while higher-risk markets can offer 8-10%+ to compensate for that added risk.
Cap rate vs cash-on-cash return
Cap rate evaluates the property itself (NOI ÷ property value). Cash-on-cash return evaluates your personal investment (annual cash flow after mortgage ÷ total cash invested). A property with a 6% cap rate could yield a 12% cash-on-cash return with 50% leverage, or 4% if expenses run higher than expected. Use cap rate to screen properties; use cash-on-cash to evaluate your specific deal.
Frequently asked questions
How do you calculate cap rate?
Cap Rate = Net Operating Income (NOI) ÷ Property Value × 100. NOI = gross rental income minus operating expenses (property tax, insurance, maintenance, management, vacancies). A property worth $300,000 with $21,000 NOI has a 7% cap rate.
What is a good cap rate for rental property?
It varies by market: 4-5% in expensive cities (NYC, SF, LA) where appreciation is expected; 6-8% in mid-tier markets; 8-10%+ in smaller or higher-risk markets. A higher cap rate means higher income relative to price, but often comes with more risk, maintenance, or lower appreciation potential.
Does cap rate include mortgage payments?
No — that's intentional. Cap rate strips out financing to let you compare properties on their own merits. Two identical properties should have the same cap rate regardless of whether one buyer pays cash and the other borrows 80%. Your actual return depends on your financing — use cash-on-cash return for that.
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Last updated: September 6, 2026