Cap Rate Calculator

How cap rate works

Cap rate is a quick way to express how much income a property produces relative to its price. It is useful when comparing several properties, because a higher percentage means more income for the same value — though it often comes with more risk or a less desirable location.

The cap rate does not include the mortgage. That is deliberate: it describes the property, not your financing. To see what actually lands in your bank account, use the cash flow calculator.

What counts as net operating income?

Net operating income is the rent you collect in a year minus the operating costs you pay to keep the property running: management, insurance, property tax, service charges, utilities you cover, and a maintenance allowance. It does not include the mortgage payment, capital improvements, or personal tax.

Cap rate calculator with a mortgage

A cap rate deliberately ignores the mortgage, so two landlords buying the same property at the same price get the same cap rate even if one pays cash and the other borrows 75%. If you want the mortgage included, run the numbers twice: use this page for the cap rate, then put the same rent and costs plus your monthly loan payment into the cash flow calculator. The gap between the two is exactly what financing costs you.

A worked example: rent of 2,000 a month with 700 of operating costs gives a net operating income of 15,600 a year. On a 260,000 valuation that is a 6.00% cap rate. Add a 1,100 monthly mortgage payment and the property still shows 6.00% — but only 2,400 a year actually reaches your bank account. Lenders look at cover as well, which is what a debt service coverage ratio measures.

Cap rate calculator with vacancy

A cap rate built on 12 months of perfect rent flatters the property. To include vacancy, lower the rent you feed into net operating income before you calculate: at one empty month a year, use 11 months of rent, which is roughly 8% less. On the example above, 15,600 of net operating income becomes about 13,600, and the cap rate drops from 6.00% to about 5.23%.

That is usually the more honest number, especially in markets with frequent turnover. To size the hit for your own property, use the vacancy cost calculator first, subtract the annual figure from your rent, then come back here.

Cap rate on purchase price or current value?

Both are used, and they answer different questions. Purchase price gives your entry cap rate — what the deal yielded on the day you bought. Current market value gives today's cap rate, which is what matters when deciding whether to keep, refinance or sell, because a property that has risen in value now yields less on the money tied up in it. If the two have drifted apart, also look at return on equity.

What this calculator does not do

It does not predict future prices, financing costs, or tax outcomes. It simply turns the net operating income and value you enter into a cap rate. Use it as one input among many when evaluating a property.