Calculate capitalization rate (cap rate) for investment properties. Evaluate whether a property generates sufficient returns relative to its market value.
What the building earns, against what it costs
Rent, before anything comes out
$
%
Typical vacancy loss (5–10% for single-family; 5–15% for multifamily).
A 6.55% cap rate describes the building, not the deal you financed
The default scenario collects $36,000 of rent, loses 5% to vacancy, and spends $8,000 running the place, leaving $26,200 of net operating income against a $400,000 price — a cap rate of 6.55%. No mortgage appears anywhere in that calculation, and that is deliberate. Two buyers paying the same price for the same building get the same cap rate whether one pays cash and the other borrows 80%.
Cap Rate = NOI / Property Value × 100 | NOI = Effective Gross Income − Operating Expenses
Stripping out the financing is what makes cap rates comparable. It isolates the asset from the balance sheet of whoever happens to own it, so a 6.55% building can be set against a 5.5% building across town and the difference reflects the properties rather than two different mortgages. The moment you want to know what the deal does for you specifically, you need cash-on-cash return instead, which does count the debt.
Mortgage interest, depreciation and capital works all stay out of NOI
Net operating income includes the costs of running the building: property taxes, insurance, management, repairs, utilities the owner pays, and a realistic allowance for vacancy and collection loss. It excludes mortgage payments, because those belong to the buyer rather than the building; depreciation, because it is a tax construct rather than cash; and capital expenditure such as a new roof, because that is investment rather than operation.
That last exclusion is where cap rates are most often flattered. A building that needs $4,000 a year of roof, boiler and turnover work still shows a clean NOI if those are booked as capital. Two sellers can present the same property at 6.55% and 7.4% purely by classifying costs differently, which is why the expense figure you type matters more than the price.
A quick sanity test: on a residential rental, operating expenses excluding debt commonly run 35–50% of gross rent. The default here is 22%, deliberately optimistic for a well-maintained property with no management fee.
The same $26,200 of income is worth $436,667 at a 6% cap and $327,500 at 8%
Because cap rate is income divided by value, it rearranges into value equals income divided by cap rate. That is how commercial property is actually priced: the market sets a cap rate for a class of asset in a location, and the building is worth whatever income it throws off at that rate. The two implied valuations shown here bracket the default building under a two-point swing in market sentiment.
The consequence is that cap rate movement is a valuation risk quite separate from rents. If rates rise and buyers start demanding 8% instead of 6%, a building whose income has not changed at all is worth $109,167 less. This is also the clearest route to forced appreciation: raise the NOI by $5,000 through higher rent or lower costs and, at a 6.55% cap, you have added roughly $76,000 of value.
An 11.11 GRM screens a listing in seconds, and tells you nothing about running costs
The gross rent multiplier is price divided by gross annual rent — here $400,000 over $36,000, or 11.11. It needs only two numbers, both usually in the listing, which makes it a fast first filter across many properties. A lower multiple is cheaper relative to rent.
What it cannot see is the expense side. Two buildings at an 11.11 GRM are not comparable if one pays its own heating and the other does not, or if one sits in a jurisdiction with double the property tax. Use GRM to decide which listings are worth the effort of gathering real expense figures, then use the cap rate to decide which are worth buying.
It is a single year, at today’s rent, with no growth and no exit
A cap rate is a snapshot. It says nothing about whether rents in the area are rising or falling, whether the leases in place are above or below market, or what the building will be worth when you sell. A 6.55% yield on a property with rents 20% under market is a different investment from the same yield where rents are already at the ceiling.
Nor does it price the work. A property bought at an attractive cap rate because it is half empty carries lease-up cost and risk that never appear in the ratio. For a full picture, run the cap rate first to see whether the asset is sensibly priced, then model the financing, the capital works, and a realistic exit before committing.
Frequently Asked Questions
What is a good cap rate for rental property?
It depends on location and risk tolerance. In major metros (NYC, SF, LA), 3–5% cap rates are common and accepted. In mid-tier cities, 6–8% is typical. In rural or high-risk areas, 9%+ compensates for risk. As a rule: lower cap rate = safer market with more appreciation potential; higher cap rate = higher yield but more risk/less appreciation.
What is the difference between cap rate and cash-on-cash return?
Cap rate ignores financing — it’s NOI / property value. Cash-on-cash return accounts for your actual mortgage: it’s annual pre-tax cash flow / actual cash invested (down payment + closing costs). A 6% cap rate property with 30% down and 6.5% mortgage might have a 2–4% cash-on-cash return.
Why are mortgage payments excluded from NOI?
NOI is a property-level metric that measures the income-generating power of the property itself, independent of how it’s financed. Two investors buying the same property — one with cash, one with a mortgage — have the same NOI but very different cash flows. This allows cap rate to be a universal comparison tool.
What is the gross rent multiplier (GRM)?
GRM = Property Price / Annual Gross Rent. It’s a quick filter: a $400K property renting for $36K/year has a GRM of 11.1. Multiply months of rent to get a GRM in months: 133 months ≈ 11.1 years. Lower GRM = better price relative to rent. GRM ignores expenses and vacancy — use cap rate for deeper analysis.
How does raising the cap rate change a property’s value?
Value and cap rate move in opposite directions for a given income. If a property produces $26,000 of NOI, it is worth about $433,000 at a 6% cap rate but only about $325,000 at an 8% cap rate. When buyers demand higher cap rates — often because rates rise or a market feels riskier — prices fall even if rents do not change. This is why commercial values are so sensitive to the cap rate environment.
Should I use my purchase price or current market value?
Both are useful for different questions. Using your purchase price tells you the yield on what you actually paid. Using current market value tells you the yield a new buyer would get today, which matters when deciding whether to hold or sell. The two cap rates diverge as the property appreciates, so be clear about which one you are computing.
Sources & References
Figures on this page are checked against primary, authoritative sources. Links open in a new tab.
Returns are assumptions, not guarantees. Actual results may vary because of market performance, taxes, fees, inflation, and timing. This is an educational projection, not investment advice.
Published the calculator with its formula, worked example, assumptions, limitations and FAQs, and added an automated formula test suite covering it.
Surfaced the implied valuation at an 8% cap rate, which the page had been calculating but never displaying, so the effect of a shift in market cap rates is now visible alongside the 6% figure.
Frequently Asked Questions now show on the page: 6 answers, checked in a page-by-page audit.
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