How to use this calculator
Enter four figures for the property.
- Property value: the purchase price or the current market value.
- Monthly rent: total rent when every unit is let.
- Vacancy %: the share of the year you expect the property to sit empty or rent to go unpaid.
- Yearly operating expenses: the costs of running the property, such as property taxes, insurance, repairs, management fees and any utilities the owner pays.
Leave mortgage payments out. They are not part of net operating income. The calculator returns the cap rate, net operating income (NOI), effective gross income, vacancy loss and the expense ratio.
Worked example
These are the starting values in the calculator above and the results they give. Change any input to see your own numbers.
- Property value
- $500,000
- Monthly rent
- $4,000
- Vacancy
- 5%
- Operating expenses per year
- $12,000
- Cap rate
- 6.72%
- Net operating income
- $33,600
- Effective gross income
- $45,600
- Vacancy loss
- $2,400
- Expense ratio
- 26.3%
How cap rate is calculated
The calculation runs in steps.
- Monthly rent is multiplied by 12 to get the yearly rent at full occupancy.
- Vacancy loss is that yearly rent multiplied by the vacancy percentage.
- Effective gross income is yearly rent minus vacancy loss. It is the rent you actually expect to collect.
- Net operating income is effective gross income minus yearly operating expenses.
- Cap rate is NOI divided by property value, shown as a percent.
The expense ratio compares operating expenses with effective gross income. It shows how much of the rent collected goes on running the property.
Because NOI ignores financing, the cap rate describes the property itself, not the deal. It is the return you would earn in a year if you bought the property outright with cash.
Cap rate = NOI ÷ Property value × 100; NOI = Monthly rent × 12 × (1 − Vacancy) − Operating expenses- NOI
- net operating income for the year
- Vacancy
- vacancy rate, as a decimal
- Operating expenses
- yearly costs of running the property, excluding mortgage payments
- Monthly rent × 12 × (1 − Vacancy)
- effective gross income
What a good cap rate looks like
Cap rate is mainly a tool for comparing similar properties. It also works as a rough gauge of risk.
- Lower cap rates tend to appear in sought-after locations with stable tenants. Buyers pay more for each dollar of income because they see it as safer.
- Higher cap rates tend to appear where income is less certain, the building needs work or demand is weaker. The extra yield is payment for extra risk.
As a loose rule of thumb, many investors look at a range of roughly 4% to 10%, but typical figures shift with the location, the property type and wider market conditions. A cap rate is only meaningful next to those of comparable properties nearby.
Keep the limits in mind. Cap rate is a one-year snapshot. It does not include financing, future rent growth, changes in property value or large one-off repairs. If you plan to borrow, check whether the income covers the loan with the DSCR calculator, and estimate the loan itself with the mortgage calculator. For a return measure that includes your own cash and any sale proceeds, see the ROI calculator.
Frequently asked questions
What is a cap rate?
A cap rate, short for capitalization rate, is a property's yearly net operating income divided by its value. It expresses the income the property produces as a percentage, before any loan costs. Investors use it to compare rental properties quickly and to judge whether an asking price is reasonable for the income on offer.
What is a good cap rate for a rental property?
It depends on the location, the type of property and the risk you are willing to take. Many investors look at a range of roughly 4% to 10% as a loose rule of thumb. Lower rates usually go with safer, more desirable properties, and higher rates with more risk. The useful test is how a property compares with similar ones in the same area.
Does cap rate include the mortgage?
No. Cap rate is based on net operating income, which leaves out loan payments, interest and other financing costs. That is deliberate. It lets you compare properties on their own merits, whatever way each buyer chooses to pay. To see the return on the cash you put in after loan payments, investors use a separate measure called cash-on-cash return.
What is net operating income?
Net operating income, or NOI, is the rent a property is expected to collect in a year, after allowing for vacancy, minus the costs of operating it. Operating costs include property taxes, insurance, maintenance and management. NOI excludes mortgage payments, income tax and major one-off improvements. It is the figure that both cap rate and lender coverage tests are built on.
What is the difference between cap rate and ROI?
Cap rate compares one year of net operating income with the full value of the property and ignores financing. ROI compares your total gain with the money you actually invested, and it can include loan costs, rent growth and profit from a sale. Cap rate is a quick way to compare properties. ROI describes the result of your own deal.
This calculator gives estimates for education only. It does not know your full situation and is not financial advice. Reviewed and updated November 15, 2026.