How do you calculate cap rate?

Cap rate = net operating income ÷ purchase price. Net operating income is annual rent minus vacancy and all operating expenses — taxes, insurance, management, maintenance, capital expenditure reserves, HOA and owner-paid utilities. The mortgage is deliberately excluded.

Does cap rate include the mortgage?

No. Cap rate measures the property, not the financing, which is what makes it comparable between buyers. Two investors paying the same price for the same building get the same cap rate even if one pays cash and the other borrows 80%.

What is a good cap rate?

It depends entirely on the market and the risk. A 4% cap in a coastal city and an 8% cap in a small midwestern town can be the same quality of deal — the higher number is compensation for slower growth, thinner tenant demand or more maintenance. Compare cap rates within a market, not across markets.

Cap rate vs cash-on-cash return — what is the difference?

Cap rate ignores your loan and measures the property. Cash-on-cash divides the cash left after the mortgage by the cash you invested, so it measures your position in the deal. A property has one cap rate and as many cash-on-cash returns as there are ways to finance it.

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Cap Rate Calculator

Cap rate is net operating income divided by price. The division is easy; the income is where people go wrong. This builds the NOI line by line — vacancy, management, maintenance and capex charged, mortgage deliberately left out — so you can see what the number is actually made of.

The property

Purchase price $ Monthly rent $ Annual property taxes $ Worth looking up — real bills run from under 0.4% to over 2.2% of value. Annual insurance $

Assumptions

These four are the ones that separate a real NOI from a brochure one.

Vacancy % of rent Management % of rent Maintenance % of rent Capital expenditure % of rent Monthly HOA $ Owner-paid utilities $/mo

Cap rate

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Gross yield — Annual rent ÷ price, before any expense. Always flattering.

Gross rent multiplier — Price ÷ annual rent. Lower is cheaper, per dollar of rent.

Expenses as % of rent — 40–50% is normal for a single-family rental. Much lower usually means something is missing.

How the NOI is built

No mortgage line, on purpose. Cap rate measures the property; how you paid for it is a separate question and belongs in cash-on-cash instead.

What this income is worth at other cap rates

This is how the metric is actually used: buyers and appraisers value a property by dividing its income by the cap rate the market is paying. Raise the NOI or find a market pricing at a lower cap, and the same building is worth more.

What belongs in NOI, and what does not

Almost every argument about cap rate is really an argument about the income line. Two rules settle most of it.

The mortgage stays out. Not because interest is not real, but because including it would mean the same building has a different cap rate for every buyer — which destroys the only thing the metric is for.
Vacancy, maintenance and capex stay in. They arrive irregularly, which tempts people to leave them out of a "current" NOI. A number that assumes permanent occupancy and an immortal roof is not net operating income; it is gross rent wearing a suit.

Listing sheets tend to quote NOI the flattering way. When a broker's cap rate and yours disagree, the expense line is nearly always where the difference lives — not the rent.

Reading a cap rate honestly

A high cap rate is compensation for something. Slower appreciation, thinner tenant demand, older buildings, a market people are leaving. A low one is what buyers pay for the opposite. Neither is good or bad on its own, which is why comparing cap rates across markets tells you almost nothing while comparing them within one tells you a great deal.

The useful move is the last table above: hold the income fixed and ask what the property is worth at the cap rate your market actually trades at. That is the same arithmetic an appraiser runs, and it is how forcing NOI up — better rent, lower expenses — turns into equity rather than just cash flow.

Questions people ask

Cap rate or cash-on-cash — which should I use?: Both, for different questions. Cap rate compares two properties. Cash-on-cash compares two uses of your money. A property has one cap rate and as many cash-on-cash returns as there are ways to finance it.
Should I use the purchase price or the current value?: Purchase price when you are deciding whether to buy. Current market value when you are deciding whether to keep — because that is the money you would free up by selling, and it is what your capital is really earning today.
Why is my cap rate lower than the listing says?: Usually vacancy, management and capex. Add three reserves at 5–8% of rent each and a headline 8% cap becomes a 6% one. The listing is not necessarily lying; it is quoting the number that sells.

See the whole deal

Cap rate says nothing about your loan, your cash-on-cash return, or what the property does over ten years. The full analyzer adds all of it, with real rent comparables instead of your estimate. For monthly cash flow, try the rental property calculator.

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