Real estate & rental
Real Estate Cap Rate Calculator
Works capitalisation rate, which values a property on its income and ignores how it is financed.
Result
An arithmetic tool, not investment advice. Property returns depend on the local market, the condition of the building, financing terms and tax position, none of which a calculator can see. Verify the income and expense figures against actual statements rather than a seller's projection. Cap rate deliberately excludes mortgage payments, depreciation and income tax, so it measures the property rather than the deal. Two buyers paying the same price with different financing get the same cap rate and very different returns. Vacancy, repairs and capital expenditure are the three line items most often left out of a listing's numbers, and together they routinely account for 20% to 30% of gross rent. A pro forma that omits them is a marketing document, not an analysis.
Get a Free Business AuditHow the calculation works
Net operating income divided by the property value or price. Net operating income is rental income less operating expenses, and it deliberately excludes mortgage payments, capital improvements, depreciation and income tax, which is what allows two properties to be compared on the income they produce regardless of how each buyer would finance them.
What moves the number
- Net operating income, and what has been counted as an operating expense.
- Vacancy and credit loss allowance.
- Whether a management fee is included even when self-managing.
- The value or price used as the denominator.
Where this one goes wrong
Cap rates are inflated by leaving expenses out, and the usual omissions are a vacancy allowance, a management fee where the owner manages themselves, and a reserve for capital items such as roofs and systems. A cap rate built on a seller's expense figures is almost always optimistic for those reasons, and recalculating on your own assumptions is the single most useful thing to do with the number. Capital expenditure is excluded from net operating income by convention, which means a property needing a new roof shows the same cap rate as one that does not.
Before you quote
- Include a vacancy allowance and a management fee.
- Rebuild the expenses yourself rather than using the seller's figures.
- Remember capital items sit outside the calculation entirely.
Questions
About this calculator
What does cap rate leave out?
Financing, capital expenditure, depreciation and income tax. That is deliberate, since it lets properties be compared on income regardless of how each buyer would finance them, but it also means a property needing a new roof shows the same cap rate as one that does not.
Why do seller cap rates look better than mine?
Usually because the expense figures omit a vacancy allowance, a management fee, or a reserve for capital items. Rebuilding the expenses on your own assumptions is the most useful thing you can do with the number before relying on it.
Should a management fee be included when I manage myself?
Including it is the more honest approach, because your time has a cost and a future buyer or a change in your circumstances would require paying for it. Leaving it out makes the property look better than it would perform in anyone else's hands.
The formula
cap rate = net operating income / price; NOI = effective gross income - operating expenses
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How to use this calculator
- Purchase price or value ($). Enter your own figure; the page starts at $385,000.
- Gross annual rent ($). Enter your own figure; the page starts at $42,000.
- Vacancy allowance (%). Enter your own figure; the page starts at 7%.
- Property taxes per year ($). Enter your own figure; the page starts at $4,800.
- Insurance per year ($). Enter your own figure; the page starts at $1,600.
- Maintenance and repairs per year ($). Enter your own figure; the page starts at $3,200.
The result updates as you type, so you can try a figure, see what it does to cap rate, and change it back. Nothing you enter is sent anywhere or saved.
A worked example
These are the figures the calculator opens with. Every number in the results column below is produced by the same calculation the page runs, so you can follow it through before putting your own figures in.
What goes in
| Input | Value |
|---|---|
| Purchase price or value | $385,000 |
| Gross annual rent | $42,000 |
| Vacancy allowance | 7% |
| Property taxes per year | $4,800 |
| Insurance per year | $1,600 |
| Maintenance and repairs per year | $3,200 |
| Management per year | $3,000 |
| Other operating expenses | $1,200 |
What comes out
| Result | Value |
|---|---|
| Cap rate main result | 6.56% |
| Net operating income | $25,260 |
| Effective gross income | $39,060 |
| Operating expenses | $13,800 |
| Expense ratio | 35.3% |
Net operating income is $25,260, a cap rate of 6.56% at $385,000. Operating expenses take 35.3% of effective income, which is the figure to compare against similar properties.
How sensitive the answer is
Holding everything else steady and changing only purchase price or value, this is what happens to cap rate. It is worth knowing which of your inputs the answer actually hinges on, and which barely move it.
| Purchase price or value ($) | Cap rate |
|---|---|
| $192,500 | 13.12% |
| $288,750 | 8.75% |
| $385,000 example above | 6.56% |
| $577,500 | 4.37% |
| $770,000 | 3.28% |
Every other input is held at the example value while this one changes, which is not how a real job behaves. Treat it as a guide to which number matters most, not as five separate quotes.
What each figure means
- Purchase price or value ($)
- A money amount, starting at $385,000.
- Gross annual rent ($)
- A money amount, starting at $42,000.
- Vacancy allowance (%)
- A percentage, between 0 and 50, starting at 7%.
- Property taxes per year ($)
- A money amount, starting at $4,800.
- Insurance per year ($)
- A money amount, starting at $1,600.
- Maintenance and repairs per year ($)
- A money amount, starting at $3,200.
- Management per year ($)
- A money amount, starting at $3,000.
- Other operating expenses ($)
- A money amount, starting at $1,200.
What the results tell you
| Result | What it is |
|---|---|
| Cap rate | The headline result. A percentage. |
| Net operating income | A money figure. |
| Effective gross income | A money figure. |
| Operating expenses | A money figure. |
| Expense ratio | A percentage. |
What is not in this number
Property figures here exclude the costs that decide whether a deal works: vacancy, maintenance, management, capital expenditure and the transaction costs at both ends. A return that looks strong before those frequently does not survive them.
Keep going
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