Cap Rate Calculator

Capitalization rate — 'cap rate' — is the yield metric that turns any income-producing property into a comparable investment. It's the annual unlevered return you'd get if you paid cash and everything went as expected. This calculator gives you the number in seconds and explains what to do with it.

Enter purchase price and annual net operating income (NOI) to compute cap rate — the standard real estate yield metric.

How to compute NOI

Net Operating Income is gross rental income plus other property income (parking, laundry, storage), minus vacancy loss, minus operating expenses (property tax, insurance, utilities, maintenance, management, reserves). NOI does not subtract debt service, depreciation, income taxes, or capital improvements.

Reading a cap rate

Higher cap rates mean higher yield but usually higher risk. Class A downtown office in a top-5 metro might trade at 4.5% cap; a small tertiary-market strip retail might trade at 8.5% cap. Neither is 'right' — they reflect different risk-adjusted expectations.

Cap rate compression and expansion

When rates fall or a market gets hot, cap rates compress (prices rise for the same NOI). When rates rise or fundamentals soften, cap rates expand (prices fall). A 100 bps cap rate expansion on a $10M property drops value roughly 15–20%.

Using cap rates in underwriting

Underwrite going-in cap rate (Year 1 stabilized), exit cap rate (assumed at sale, typically 25–75 bps higher than going-in), and cap-rate-adjusted value tests. If your exit-cap assumption is more aggressive than your going-in, you're betting on cap rate compression — a risky bet.

Cap rate benchmarks by asset class

Multifamily class A in top-25 metros typically trades 4.25–5.25%. Multifamily class B in tertiary markets: 6.5–8.0%. Industrial big-box in coastal port markets: 4.0–5.0%. Industrial secondary: 6.0–7.5%. Grocery-anchored retail: 5.5–7.0%. Un-anchored strip retail: 7.5–9.5%. Suburban office (post-2020): 8.0–11.0% and rising. Self-storage: 5.5–7.5%. Medical office: 5.5–7.5%. Hotels: 8.0–10.5% with much higher volatility. These are directional 2024 ranges — cap rates move with interest rates and asset-class sentiment, so pull recent comparable sales before pricing a deal.

Cap rate as a valuation shortcut

Inverting the formula — Value = NOI ÷ Cap Rate — turns cap rate into a value estimator. A property producing $500,000 NOI at a market cap rate of 6.5% is worth roughly $7.7M. This shortcut is fine for triage, but it hides critical inputs: the quality and durability of the NOI, near-term capex needs, lease rollover risk, and the delta between in-place and market rents. A property with a 6.5% cap rate on trailing NOI can be a very different investment than one with a 6.5% cap on stabilized pro forma NOI. Always ask which NOI is in the cap rate.

Worked Example

Example: A 12-unit multifamily property produces $780,000 gross income, has 5% vacancy, and $310,000 in operating expenses. NOI = 780,000 × 0.95 − 310,000 = $431,000. Purchase price $6.8M. Cap rate = 431,000 ÷ 6,800,000 = 6.34%.

Common Mistakes

• Confusing gross yield with cap rate. • Subtracting debt service from NOI. • Ignoring capital reserves and management fees. • Comparing cap rates across different asset classes without adjusting for risk.

How It Works

  1. Step 1 — Cap Rate = (Annual NOI ÷ Purchase Price) × 100.
  2. Step 2 — NOI is gross income minus operating expenses, before debt service and taxes.
  3. Step 3 — Cap rate lets you compare properties independent of financing.

Frequently Asked Questions

What is a good cap rate?
It depends on asset class, market, and risk. 4–6% is common for stabilized class A; 7–10% is common for value-add and secondary markets.
Does cap rate include mortgage?
No. Cap rate is unlevered — it excludes debt service.
Cap rate vs. cash-on-cash?
Cap rate is unlevered yield on price. Cash-on-cash is levered yield on cash invested. They can differ dramatically with leverage.
How is exit cap rate chosen?
Typically 25–75 bps above going-in cap rate to account for property age and uncertainty. Sensitivity-test it.

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