Cap Rate Calculator

What a cap rate actually measures

The capitalisation rate is one year of net operating income divided by the price of the property. Nothing more. It is the yield the building throws off, expressed as a percentage, on the assumption that you bought it outright and nothing changes.

That assumption is the whole point. By deliberately ignoring how the purchase was financed, the cap rate becomes the one number that can be compared across two buildings bought by two different investors under two completely different loans. Strip out the debt and what is left describes the asset itself: how much income it produces relative to what it costs.

The consequence is that a cap rate is not a return you will personally receive. It is a price signal — the market's opinion of how much income is worth in this location, for this asset class, at this moment. Your actual return depends on your loan, your tax position and what the property does over the years you hold it, none of which appear anywhere in the formula.

The mortgage does not belong in this calculation

Net operating income is calculated before debt service, and the loan payment never enters it. Not the interest, not the principal, not the mortgage insurance. This is not a stylistic convention; it is what makes the number mean anything.

Consider two identical duplexes on the same street, both producing $18,000 of NOI on a $300,000 price. One is bought with cash, the other with 25% down. Both have a 6% cap rate, because the property is identical and the cap rate describes the property. The buyers' outcomes are wildly different, but that difference belongs in the cash-on-cash figure, not here.

Two other items are excluded for the same reason. Depreciation is a tax fiction, not cash leaving the building, and it varies with when and how the owner acquired the asset. Income tax depends on the owner's bracket, other income and entity structure. Both describe the taxpayer, not the property. You will notice this calculator has no field for either — that is the surest way to keep them out.

Vacancy is the gap between the listing and the ledger

A unit renting for $2,400 a month does not produce $28,800 a year. It produces that minus the weeks between tenants, minus the month you spent repainting, minus the tenant who left owing the last two weeks. Underwriting with full contract rent is the fastest way to manufacture a cap rate that does not exist.

Gross scheduled income becomes effective gross income only after vacancy and credit loss are subtracted. A 5% vacancy allowance is roughly eighteen days a year, which is optimistic for anything but a tight market with long-stay tenants. Turnover-heavy property realistically runs 8-10%.

The effect on the headline number is smaller than the raw percentage suggests but still decisive, because the expenses charged as a share of income shrink alongside it. On the default inputs here, dropping the vacancy allowance to zero lifts the cap rate by about four tenths of a percentage point; at a 10% allowance the gap is nearer three quarters. That is routinely the difference between a deal that clears your hurdle and one that does not.

The reserve that turns a good deal into an average one

Every seller's expense sheet lists taxes, insurance and management. Almost none list capital expenditure, because in any given year there may have been none. Then the roof reaches thirty years old, and one line item eats three years of cash flow.

CapEx is not maintenance. Maintenance is the tap, the service call, the turnover paint. CapEx is the roof, the furnace, the water heater, the windows, the parking surface — items that fail on a schedule of decades and cost thousands when they do. They are certain; only the timing is unknown. Ignoring them does not make them cheaper, it just moves the cost from your spreadsheet to your bank account.

Reserving 5-10% of collected rent is the common rule, higher for older buildings and lower for new construction still under warranty. It is the single line most responsible for the gap between an advertised cap rate and the one the property delivers.

Read it backwards: price = NOI ÷ cap rate

Rearranged, the formula stops describing a deal and starts pricing one. If a property nets $18,000 and you require a 7% return for the risk, the most you can pay is $257,143. At 6% the same income supports $300,000. At 5%, $360,000.

Two things follow from that. First, this is how income property is valued in practice — an appraiser or a buyer takes the market cap rate for the submarket and divides. Second, every dollar added to NOI is worth many times itself in price: at a 6% cap rate, cutting $1,200 a year of expenses adds $20,000 of value. That multiplier is why operational improvements matter so much more in commercial property than in a house.

It is also the most useful thing you can do before making an offer. Underwrite the income yourself, choose the return the risk deserves, and let the arithmetic produce a number instead of negotiating against the asking price.

A high cap rate is a price for risk, not a discount

Cap rates are inversely related to price, so a high one means the market is paying less for each dollar of income. There is always a reason. A 12% cap rate in a shrinking neighbourhood, on a fifty-year-old building with month-to-month tenants, may be considerably worse to own than 5% on a stabilised property in a market with a waiting list.

What the higher number is compensating you for is usually some combination of tenant quality, rent that will not grow, a building whose CapEx bill is already due, a market losing population, and an exit where the next buyer demands an even higher cap rate. That last risk is the one that hurts: if you buy at 12% and sell at 14%, the property's income can rise while its value falls.

Comparing cap rates across cities without adjusting for that risk is the error underneath most bad out-of-state purchases. The number looked better precisely because it was supposed to.

Cap rate, cash-on-cash and total return

These get used interchangeably and answer completely different questions.

Leverage is what separates the first two. Borrow below the cap rate and cash-on-cash rises above it — positive leverage. Borrow above it and cash-on-cash drops below the cap rate and can go negative while the building itself is perfectly sound. That is why the financing box in this calculator is fenced off: it changes the second number and must never touch the first.

How a listed cap rate gets inflated

• Full contract rent, no vacancy. Worth a few tenths of a point in a tight market and closer to a full point where turnover is high. The most common adjustment in any marketing package.
• Pro-forma rents instead of actual ones. The income a broker believes the property could achieve after improvements, presented as if it already does.
• No CapEx reserve. Silent, easy to defend as "there were no capital works last year", and worth roughly another four tenths of a point.
• Self-management assumed. Management is left out because the current owner does it themselves. Your time is not free, and if you ever stop, the expense appears.
• Price excluding closing costs. Real acquisition cost includes transfer tax, legal fees and any immediate repairs. Those do not change the cap rate, but they absolutely change what your money earns.

Rebuild the number from the actual tax bill, the actual insurance quote and a realistic vacancy figure before you compare it to anything. Everything in this tool stays in your browser: nothing is uploaded, nothing is logged and there is no account.