What is cap rate?
Cap rate is annual net operating income divided by property value, expressed as a percentage.
Formula
Cap Rate = Net Operating Income / Property Value * 100
Cap rate example
If a rental property has $24,500 in annual net operating income and a $350,000 value, the estimated cap rate is 7.0%.
How It Works
- Annual gross income is rent plus other income multiplied by 12.
- Vacancy allowance and annual operating expenses are subtracted to estimate net operating income.
- Debt service is intentionally excluded because cap rate compares the property before financing choices.
Why It Is Important
- Cap rate helps compare income-producing properties using a common yield metric.
- It can help separate property performance from loan structure.
- It should be used with cash flow, occupancy, and local market context rather than by itself.
Important Limits
This calculator is for planning and education. It does not replace accounting, tax, lending, legal, appraisal, or investment advice. Actual performance depends on rent collection, lease terms, repairs, vacancy, financing, taxes, insurance, local market conditions, and the quality of your source records.