Cap Rate Calculator guide
Capitalization rate is a quick way to compare a property’s unleveraged operating income with its value. It is useful for screening, but it should not replace a full review of rents, expenses, physical condition, financing and future capital needs.
Cap-rate formula
Cap rate equals annual net operating income divided by property value or purchase price. NOI should reflect recurring property income less normal operating expenses, before mortgage payments, depreciation and income taxes.
Use consistent assumptions
A cap rate is only as reliable as the NOI behind it. Normalize unusual income, use realistic vacancy, include management and reserves where appropriate, and verify taxes, insurance and utilities. Comparing one property’s trailing NOI with another property’s optimistic pro forma can be misleading.
What cap rate does not tell you
Cap rate does not show loan leverage, cash invested, tax consequences, large deferred repairs or the timing of future rent growth. Review cash-on-cash return, DSCR, physical condition and market risk alongside cap rate.