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Capitalization rate (cap rate) is one of the most widely used metrics for comparing rental property investments — it measures a property's return independent of how it's financed, making it useful for comparing deals with different financing structures.
This calculator computes net operating income (NOI) from your rental income and expenses, then divides by the property price to get the cap rate.
How it works
Enter the property price, annual rental income, and annual operating expenses (property tax, insurance, maintenance, management fees — excluding mortgage payments). The tool subtracts expenses from income to get NOI, then divides by property price for the cap rate.
- Enter property price.
- Enter annual rental income.
- Enter annual operating expenses (optional).
- Click Calculate to see your results.
Examples
A property with a 7% cap rate
A $300,000 property generating $30,000 in annual rent with $9,000 in operating expenses has a $21,000 NOI, giving a 7% cap rate.
Who should use it
- Comparing multiple rental property investment opportunities.
- Quickly assessing a property's return potential before deeper due diligence.
Industry applications
- Real estate investment
- Property management and acquisition
Advantages
- Financing-independent, making it useful for comparing deals with different financing structures.
- Simple, widely-recognized real estate investment metric.
Limitations
- Doesn't account for financing costs or cash-on-cash return, which matter for an actual leveraged purchase decision.
Common mistakes to avoid
- Including mortgage payments in operating expenses, which defeats the purpose of a financing-independent metric.
- Comparing cap rates across very different markets without adjusting for local risk and demand differences.
Best practices
- Compare cap rates only against similar properties in the same market, since "normal" cap rates vary significantly by location and property type.
Tips
- Use cap rate as an initial screening tool, then follow up with a full cash-on-cash return analysis that accounts for your actual financing terms before making a final investment decision.