Cap Rate Calculator
Calculate capitalization rate for a rental property. Enter NOI and property price — get cap rate %. Reverse-solve: enter NOI + target cap rate to derive the offer price. Browser-only.
What is cap rate?
The capitalization rate is the ratio of a property's Net Operating Income to its market value (or purchase price), expressed as a percentage. It answers: "what unlevered yield does this property produce at current operations?" It's the most common cross-deal comparison metric in commercial-style real estate because it strips out individual financing, taxation, and depreciation choices that differ between buyers.
The formula
Cap rate = NOI ÷ Price (or current market value) Max offer price = NOI ÷ Required cap rate
If a building produces $24,000 NOI and trades at a $400,000 price, the cap rate is 6%. If you require 7% to take the deal, the most you should pay is $24,000 ÷ 0.07 = $342,857.
Benchmarks (rough, 2026)
| Asset class | Typical cap range |
|---|---|
| Multifamily — urban core (A) | 4.0 – 5.5% |
| Multifamily — suburban (B) | 5.5 – 7.0% |
| Multifamily — older / tertiary (C) | 7.0 – 9.5% |
| Single-family rental | 5.0 – 7.5% |
| Net-lease retail | 5.5 – 7.5% |
| Office (post-2024 reset) | 7.5 – 11.0% |
| Industrial / logistics | 5.0 – 7.0% |
| Hotel | 7.0 – 10.0% |
These are rough ranges — actual market caps shift with the 10-year Treasury yield, lending availability, and local fundamentals. Verify against recent comparable sales (the cap rate the comp sold at, not asked-for cap), and against broker market reports for your specific city.
When cap rate is useful
- Stabilised cash-flowing assets. Existing rental with multiple years of operating history and rents at market — exactly the case cap rate was designed for.
- Comparing assets within the same class and market. Two similar buildings in the same submarket — if one trades at a 7% cap and the other at a 5% cap, the difference is signalling something (condition, tenant credit, location nuance).
- Quick sanity check. A 12% cap on a Class A building in a tier-one city is implausible — either the NOI is overstated, the price is wrong, or there's a story (lease about to roll, tenant bankruptcy).
When cap rate misleads
- Value-add deals. Buying a beat-up building to renovate and re-tenant: the current-year NOI doesn't reflect the stabilised future state. Going-in cap is low (or even negative) by design. Use stabilised cap (the projected post-stabilisation cap on the all-in basis) instead.
- Development / ground-up. No NOI yet. Use yield-on-cost (projected stabilised NOI ÷ total development cost) instead, and compare to market cap rate. Yield-on-cost minus market cap = development spread, your reward for taking construction risk.
- Short-term-rental or vacation properties. Volatile NOI year-to-year; cap rate based on a single year is fragile. Use trailing 3-year average NOI and apply a higher cap to compensate for volatility.
- Leases about to expire. If the main tenant rolls in 6 months and rents have moved 30%, today's NOI is a bad input. Underwrite the post-roll NOI separately.
- Below-market in-place rent. If contracted rent is below market because of long-term leases, current NOI understates earning power. Underwrite to market rent and adjust the cap.
Cap rate vs other yardsticks
- Cap rate — unlevered, single-year, financing-free.
- Cash-on-cash return — levered cash flow ÷ equity invested. Reflects your specific financing.
- IRR — total return over the full hold period, including refinancing and exit. The most rigorous yardstick — see
property-irr. - Yield-on-cost — for development / heavy value-add: projected NOI ÷ all-in cost basis.
- Gross rent multiplier (GRM) — price ÷ annual gross rent (not NOI). Quick and dirty; see
gross-rent-multiplier.
Common mistakes
- Trusting the broker's cap rate. Broker proformas routinely understate vacancy and management cost, and project rent growth aggressively. Re-underwrite NOI yourself.
- Mixing cap-rate definitions. "Going-in cap" = year-1 NOI ÷ price. "Stabilised cap" = year-3-or-5 stabilised NOI ÷ all-in basis. "Exit cap" = projected sale-year NOI ÷ sale price. Confusing these is the most common cap-rate error.
- Comparing across markets. A 6% cap in New York is not the same risk-adjusted return as a 6% cap in a tertiary market. Compare within markets.
- Ignoring leverage. A 6% cap with 5% debt = positive leverage (cash-on-cash boosted). A 6% cap with 7% debt = negative leverage (cash-on-cash worse than unlevered). Watch the spread.
Pairs with
- noi-calculator — produces the NOI input.
- gross-rent-multiplier — the cheap-and-cheerful cap-rate cousin.
- property-irr — extend cap rate into a full hold-period return.
- rent-vs-buy — landlord-side analysis (this tool) versus owner-occupier analysis.
Worked example
A building throws off $24,000 in NOI and is priced at $400,000: cap rate = 24,000 ÷ 400,000 = 6%. Now flip it. If your hurdle is a 7% return, the most you should pay is 24,000 ÷ 0.07 = $342,857 — anything above that and the deal no longer clears your bar. That inversion (NOI ÷ required cap rate = max offer) is how cap rate turns from a description into a negotiating tool.
FAQ
Does cap rate account for my mortgage? No — it's deliberately unlevered. Cap rate measures the property's own earning power so you can compare deals regardless of how each is financed. Layer financing on afterward with cash-on-cash or IRR.
Is a higher cap rate better? Not automatically. A high cap rate often signals higher risk or a weaker location — the market is paying less per dollar of income for a reason. Low cap rates cluster in prime, low-risk markets. Read it as a risk gauge, not a scoreboard.
What's a "good" cap rate? Entirely market- and asset-dependent — a stabilised urban multifamily might trade at 4–5% while secondary-market retail sits at 8%+. Compare against recent comparable sales in the same submarket, not a universal number.
Cap rate or GRM? Cap rate uses NOI (after expenses) and is the more honest measure. GRM uses gross rent and is a faster back-of-envelope screen. Use GRM to shortlist, cap rate to decide.
How it works
A cap rate is really a price expressed as a yield, so it moves inversely to price: for a fixed NOI, paying more compresses the cap rate and paying less expands it. That inversion is the whole game. When capital is cheap and buyers compete, cap rates compress and prices rise even with flat rents — "cap-rate compression" is appreciation you did nothing to earn. When rates rise and lending tightens, caps expand and the same NOI is suddenly worth less. A useful mental model: cap rate ≈ the risk-free rate (10-year Treasury) plus a risk premium for the asset, minus expected rent growth. That is why prime, low-growth-risk assets trade at low caps and older, riskier buildings trade high — the market is pricing risk and growth, not just current income.
Common mistake
Underwriting on the seller's pro-forma NOI instead of trailing actuals. Brokers quote a cap rate built on optimistic "market" rents, zero vacancy, and thin expenses — inflating NOI and making the deal look cheaper than it is. Rebuild the NOI from real trailing-twelve-month statements before you divide, and treat any "upside" as a separate bet, not as today's income. The second trap is mistaking cap rate for your return: it is an unlevered, no-growth snapshot, and says nothing about what leverage or appreciation will actually deliver.
Related
Cap rate is only as good as the NOI you feed it, so build that first; screen faster with the gross rent multiplier; and once the deal clears, model the levered return over a full hold with the property IRR calculator. For where quoted caps mislead, read cap rate reality — what the number does and doesn't tell you.