U.S. income properties
Cap rate calculator for rental property
The capitalization rate, or cap rate, is a property’s net operating income (NOI) for one year divided by its price or value. It describes the property’s income yield before any financing, which makes it a common way to compare similar rentals and to estimate what an income stream may be worth. Enter the rent, vacancy and operating expenses to see the cap rate, then a cap rate to compare to see the price that would produce it.
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Calculator
Calculate the cap rate and the value
The calculator starts with the duplex in the worked example. Replace the price, rent and expenses with the numbers for the property you are evaluating; the results update as you type.
Results
Cap rate 5.08%. NOI $21,600.00 per year. Value at the cap rate you entered $360,000.00.
- Cap rate
- 5.08%
- 5.55% before the CapEx reserve
- NOI per year
- $21,600.00
- Value at a cap rate of 6%
- $360,000.00
- Price vs. that value
- $65,000.00 above
- Gross rent multiplier
- 10.73
- Operating expense ratio
- 43.79%
- Effective gross income per year
- $38,424.00
- Operating expenses per year, with CapEx
- $16,824.00
See the annual and monthly breakdown
| Line | Annual | Monthly |
|---|---|---|
| Scheduled rent | $39,600.00 | $3,300.00 |
| Other income | $1,200.00 | $100.00 |
| Vacancy | −$2,376.00 | −$198.00 |
| Effective gross income | $38,424.00 | $3,202.00 |
| Operating expenses | −$14,844.00 | −$1,237.00 |
| CapEx reserve | −$1,980.00 | −$165.00 |
| Net operating income (NOI) | $21,600.00 | $1,800.00 |
Educational estimate based only on your inputs; not an appraisal or financial advice. Nothing you type leaves your browser.
Formula
The cap rate formula, step by step
Amounts are annual. The calculator uses the same NOI as the property analysis in the MyInversorAI app: vacancy reduces the rent, and the CapEx reserve counts as an operating expense.
- Effective gross income (EGI)
EGI = rent × 12 + other income × 12 − rent × 12 × vacancy %What the property can be expected to collect in a year after empty months and unpaid rent.
- Net operating income (NOI)
NOI = EGI − operating expenses − CapEx reserveIncome after the costs of running the property, before any mortgage payment, income tax or depreciation. Loan payments are never operating expenses.
- Cap rate
Cap rate = annual NOI ÷ purchase price (or current value)The share of the price the property returns each year from its operations, regardless of how the purchase is financed.
- Cap rate before reserves
Cap rate before reserves = (NOI + CapEx reserve) ÷ priceMany listings quote the cap rate without a replacement reserve, so it looks higher. Compare like with like.
- Value at a cap rate
Value = NOI ÷ cap rateThe same formula rearranged: the price at which the property’s income produces the cap rate you choose. For the same NOI, a lower cap rate means a higher value.
- Gross rent multiplier (GRM)
GRM = price ÷ annual scheduled rentA quicker, cruder ratio that ignores expenses entirely. It is useful only between very similar properties.
- Operating expense ratio
Expense ratio = (operating expenses + CapEx reserve) ÷ EGIThe share of collected income spent running the property. A ratio far below similar properties often means a cost is missing.
Worked example
Worked example: a $425,000 duplex
These are the calculator’s starting values for a two-unit rental. They are planning assumptions chosen to illustrate the math, not an appraisal or a forecast for any market.
Assumptions
- Purchase price
- $425,000
- Rent
- $3,300 per month for both units ($1,650 each)
- Other income (laundry)
- $100 per month
- Vacancy
- 6% of rent
- Property tax
- $5,100 per year
- Insurance
- $2,400 per year
- Repairs and maintenance
- $2,376 per year (6% of rent)
- Property management
- $3,168 per year (8% of rent)
- Water and trash (owner-paid)
- $1,800 per year
- CapEx reserve
- $1,980 per year (5% of rent)
- Cap rate to compare
- 6%
Step by step
| Step | Calculation | Result |
|---|---|---|
| Scheduled rent | $3,300 × 12 | $39,600 per year |
| Effective gross income | $39,600 + $1,200 other income − $2,376 vacancy (6%) | $38,424 per year |
| Operating expenses | $5,100 tax + $2,400 insurance + $2,376 repairs + $3,168 management + $1,800 water and trash | $14,844 per year |
| Net operating income (NOI) | $38,424 − $14,844 − $1,980 CapEx reserve | $21,600 per year ($1,800 per month) |
| Cap rate | $21,600 ÷ $425,000 | 5.08% |
| Cap rate before the CapEx reserve | ($21,600 + $1,980) ÷ $425,000 | 5.55% |
| Value at a cap rate of 6% | $21,600 ÷ 6% | $360,000 |
| Value at 5% and at 7% | $21,600 ÷ 5%; $21,600 ÷ 7% | $432,000; $308,571.43 |
| Gross rent multiplier | $425,000 ÷ $39,600 | 10.73 |
| Operating expense ratio | ($14,844 + $1,980) ÷ $38,424 | 43.79% |
At $425,000, the duplex’s $21,600 NOI is a 5.08% cap rate (5.55% without the CapEx reserve, the way many listings quote it). If similar duplexes nearby were selling at about a 6% cap rate, the same income would support a price of about $360,000, so this price is $65,000 above it. That gap is a question, not a verdict: the rent may be below market, the building may be newer, or the price may be high. One point either way moves the value between $432,000 at 5% and $308,571.43 at 7%.
Interpretation
What a cap rate tells you, and what it does not
A cap rate is a snapshot of one year of income against today’s price. It is a good comparison tool and a rough signal of risk, but it leaves out most of what decides your actual return.
What it tells you
- How much NOI each dollar of price buys today, before financing.
- How the property compares with similar properties in the same area, measured the same way.
- What price an income stream supports at the cap rates similar properties sell at (value = NOI ÷ cap rate).
- A rough read on perceived risk: buyers usually accept lower cap rates for stable, in-demand properties and ask for higher ones where income is less certain.
What it does not tell you
- Your return on the cash you invest. With a loan, the cash-on-cash return can be higher or lower than the cap rate.
- Future income: rent growth, expense increases, appreciation and the eventual sale are not in a one-year ratio.
- Whether the NOI is right. A cap rate built on optimistic rent or missing expenses is wrong by the same amount.
- The cost of repairs, renovation or furnishing before the property earns that income.
- Whether the deal fits you. That depends on your goals, financing, taxes and the property’s condition.
In practice
How investors, brokers and appraisers use cap rates
Cap rates show up in listings, broker opinions and appraisals. Knowing how each party uses them helps you read their numbers critically.
- Comparing similar properties
- Investors line up the cap rates of comparable properties, such as duplexes in the same neighborhood, to see which ones price their income higher or lower. The comparison only works when every NOI is calculated the same way.
- Estimating value from income
- For commercial properties and larger apartment buildings, appraisers often use an income approach that divides NOI by a market cap rate. For one- to four-unit homes, comparable sales usually carry more weight, and a gross rent multiplier is more common than a cap rate.
- Reading a listing
- A listing’s cap rate is the seller’s number. Ask which year’s income it uses, whether the rent is actual or projected, and whether vacancy, management and a CapEx reserve are included. Rebuild it with your own NOI before relying on it.
- Following the market
- Market cap rates tend to change over time with interest rates, expectations for rent growth and the number of buyers. When cap rates rise and NOI stays the same, values fall, and the reverse.
- Planning an exit
- Some investors estimate a future sale price by dividing a projected NOI by an assumed exit cap rate. A small change in that assumption moves the estimate a lot, so many test an exit cap rate higher than the one they buy at.
- Spotting missing costs
- An unusually high cap rate next to similar properties is a prompt to check the expenses: a missing tax increase, a low insurance figure or no reserve for an old roof can explain the difference.
Benchmarks · It depends
Typical cap rates, and why they vary
There is no single good cap rate. The ranges below are commonly discussed starting points for U.S. residential rentals, not targets, appraisals or forecasts. Recent local sales tell you more than any rule of thumb.
| Situation | Commonly discussed range | Why |
|---|---|---|
| High-cost, high-demand metro areas | Often about 3% to 5% | Buyers pay more per dollar of income where they expect steady demand and appreciation, which pushes cap rates down. |
| Many suburban and mid-size markets | Often about 5% to 7% | A middle ground between price, rent and expected risk. Results vary widely from one neighborhood to the next. |
| Lower-cost markets or higher-risk properties | Often about 7% to 10% or more | Higher income relative to price usually comes with more vacancy, repair or tenant risk, or slower appreciation. |
| Older buildings or deferred maintenance | Above nearby newer properties | A higher cap rate may simply reflect repairs the next owner must pay for. Count them before comparing. |
Two cap rates are comparable only if both NOIs include the same costs. Check whether a quoted cap rate includes vacancy, management and a CapEx reserve, and whether it uses actual or projected rent.
Compare metrics
Cap rate vs. cash-on-cash return vs. ROI
These three returns answer different questions. Reading them together shows how much of a result comes from the property and how much from the financing.
| Metric | Formula | Includes the loan? | Best for |
|---|---|---|---|
| Cap rate | Annual NOI ÷ price | No | Comparing properties and estimating value from income |
| Cash-on-cash return | Annual pre-tax cash flow ÷ cash invested | Yes: payments reduce the cash flow, and the loan reduces the cash you put in | Judging the first-year yield on your own money |
| ROI (total return) | (Cash flow + loan paydown + appreciation − selling costs) ÷ cash invested, over the years you own it | Yes | Estimating the full result of owning and selling, which depends on more assumptions |
ROI has no single standard definition: some people use it for one year of cash flow, others for the whole holding period, so ask which one a figure means. The cash-on-cash return calculator shows how a loan changes the return on the same property.
Avoid these
Common cap rate mistakes
- Subtracting the mortgage payment
- Loan payments are not operating expenses. A “cap rate” with the mortgage subtracted depends on the financing and cannot be compared with market cap rates.
- Using the listing’s projected rent
- Projected rent is a sales assumption. Use current leases or rent supported by local comparables, and include vacancy.
- Leaving out reserves and management
- Roofs and HVAC systems still wear out, and a self-managed property needs a management allowance to compare fairly with professionally managed ones.
- Comparing different property types
- A single-family rental, a duplex and a large apartment building carry different risks and sell at different cap rates. Compare like with like.
- Reading a high cap rate as a bargain
- A high cap rate can signal higher risk, weak demand or expensive repairs ahead. It is a reason to look closer, not proof of value.
- Ignoring the tax reassessment
- In many states the assessed value can change after a sale, so the buyer’s property tax, and therefore the NOI, may differ from the seller’s.
FAQ
Cap rate questions
What is a good cap rate for a rental property?
It depends on the market, the property type, its condition and the risk you accept. Lower cap rates are common in expensive, in-demand areas and higher ones where income is less certain. Compare a property’s cap rate with similar properties nearby, calculated the same way, rather than with a national number.
Does the cap rate include the mortgage?
No. The cap rate uses NOI, which is income minus operating expenses before any loan payment, so it is the same however the property is financed. Use the cash-on-cash return or the DSCR to see the effect of a loan.
Should I use the purchase price or the current value?
Use the purchase price to evaluate a purchase. Owners often use an estimate of current market value to see what the property earns on what it is worth today; that value is an estimate, not an appraisal.
Why does a lower cap rate mean a higher value?
Because value = NOI ÷ cap rate. With an NOI of $20,000, a 5% cap rate implies a value of $400,000 and a 10% cap rate implies $200,000. Buyers who accept a lower yield pay more for the same income.
Is the cap rate the same as ROI?
No. The cap rate is a one-year yield on the price, before financing. ROI usually means your total return on the cash you invest, including the loan, its paydown, appreciation and the cost of selling.
Is a cap rate the same for a house and an apartment building?
The formula is the same, but how it is used differs. Larger apartment and commercial buildings are often valued by their income, while one- to four-unit homes are usually valued mainly by comparable sales.
Next step
Run the full analysis in MyInversorAI
The free calculators check one long-term rental at a time with your own assumptions. A free MyInversorAI account adds a full property analysis that evaluates up to five strategies (rental, short-term rental, flip, BRRRR and resale) and ZipFinder listings with full addresses and Zillow links. Accounts start on the Free plan; paid plans add an English or Spanish PDF with a property visit guide.
Read before deciding
Educational estimate, not advice
The free calculators are for education and screening. They are not financial, tax, lending, legal or investment advice, an appraisal or a loan offer, and they do not guarantee any result. The figures depend entirely on the assumptions you enter. They are intended for properties in the United States. Before you make a decision, verify rent, taxes, insurance, repairs and financing with qualified professionals.