Cap Rate Calculator
Net Operating Income · Market benchmarks · Investment rating
Industry avg: 5–8%
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Annual NOI
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Cap Rate
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Rating
About This Calculator
The Capitalization Rate (Cap Rate) is one of the most important metrics in real estate investing. It measures the annual return a property generates relative to its purchase price, calculated as: Cap Rate = NOI ÷ Property Value.
A higher cap rate means higher returns but typically also higher risk. Primary markets like NYC and San Francisco typically have cap rates of 3–5%, while secondary markets like Austin or Denver range from 5–7%, and smaller markets can reach 7–10%.
Cap rate is most useful when comparing similar properties in the same market. It does not account for financing, making it ideal for comparing properties regardless of how they're purchased.
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Frequently Asked Questions
What is a good cap rate for rental property?▼
A good cap rate depends on your market. In primary markets (NYC, SF, LA), 4–6% is strong. In secondary markets (Austin, Denver, Nashville), aim for 6–8%. In smaller markets, 8–10%+ is achievable. Higher isn't always better — it may indicate higher risk.
How is cap rate different from ROI?▼
Cap rate is a property metric that ignores financing — it compares NOI to property value. ROI is investor-specific and depends on your down payment and financing terms. Use cap rate to compare properties; use ROI to evaluate your personal returns.
What expenses are included in NOI?▼
Net Operating Income (NOI) = Gross Income - Vacancy - Operating Expenses. Operating expenses include property taxes, insurance, maintenance, property management, and utilities (if landlord-paid). It does NOT include mortgage payments or depreciation.
Can cap rate change over time?▼
Yes. Cap rate changes as rents rise or fall, expenses change, or property values shift. A property bought at a 6% cap rate may compress to 5% if values rise faster than rents — common in appreciating markets.
How do I use cap rate to find a fair price?▼
Divide your NOI by the market cap rate to find fair value. Example: $24,000 NOI ÷ 0.06 (6% cap rate) = $400,000 fair value. This is called reverse cap rate analysis and is widely used by institutional investors.
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