Cap Rate Calculator

The capitalization rate (cap rate) is one of the most fundamental metrics in real estate investing. It represents the expected rate of return on an investment property based on its net operating income (NOI) relative to its market value or purchase price. Our cap rate calculator makes this calculation instant and error-free.

The cap rate formula is straightforward: Cap Rate = Net Operating Income / Property Value × 100. However, the interpretation of cap rates requires market context. A 6% cap rate might be excellent in a prime urban market where properties trade at 4-5%, but it could signal risk in a secondary market where 8-10% is standard.

Real estate investors use cap rates for several critical decisions. When acquiring properties, cap rate helps you compare potential investments regardless of their size or price point. A $500,000 property and a $5,000,000 property can be directly compared using their cap rates. When selling, understanding market cap rates helps you price your property competitively.

Cap rate is also essential for determining property value through the income approach. If you know a property's NOI and the market cap rate for similar properties, you can estimate its value by dividing NOI by the cap rate. This method is standard practice for commercial real estate valuations and bank underwriting.

It's important to understand what cap rate doesn't tell you. It doesn't account for financing—a property with great cash-on-cash returns might have a mediocre cap rate if you're using leverage. It also doesn't factor in appreciation potential, neighborhood trajectory, or value-add opportunities. Cap rate is a snapshot of current income relative to price.

Different property types have different typical cap rate ranges. Multifamily properties in strong markets might trade at 4-5% cap rates, while retail or office properties in secondary markets might trade at 8-10%. Self-storage and industrial have their own benchmarks. Understanding these norms helps you identify opportunities and avoid overpaying.