🏦 Financing & Cash-on-Cash Return
Cap rate ignores your loan. See what financing does to cash flow, coverage and return on the cash you invest.
| Annual Debt Service | DSCR | Annual Cash Flow | Cash-on-Cash Return | Loan Constant |
|---|---|---|---|---|
| $29,938.61 | 0.96x | -$1,135.41 | -0.84% | 7.98% |
| on a $375,000 loan | NOI ÷ debt service | NOI minus debt service | on $135,000 cash invested | debt service ÷ loan |
Negative leverage: the 5.76% cap rate is lower than the 7.98% loan constant, so this financing pulls your cash-on-cash return below the cap rate.
⚡ Rental Quick-Check Ratios
Fast screens investors use next to the cap rate.
| Gross Rent Multiplier | Expense Ratio | Break-Even Occupancy | Rent-to-Price (1% Rule) |
|---|---|---|---|
| 10.7x | 35.2% | 97.4% | 0.76% |
| price ÷ gross annual income | operating expenses ÷ EGI | (expenses + debt service) ÷ GPI | monthly rent ÷ price |
Cap Rate Sensitivity
See how property value changes with the cap rate buyers demand, and how your cap rate changes with the price you pay. Based on $28,803 of annual NOI.
| Cap Rate | Property Value | Change vs. Current | % Change |
|---|---|---|---|
| 4.0% | $720,080.00 | +$220,080 | +44.0% |
| 4.5% | $640,071.11 | +$140,071 | +28.0% |
| 5.0% | $576,064.00 | +$76,064 | +15.2% |
| 5.5% | $523,694.55 | +$23,695 | +4.7% |
| 6.0% ★ | $480,053.33 | -$19,947 | -4.0% |
| 6.5% | $443,126.15 | -$56,874 | -11.4% |
| 7.0% | $411,474.29 | -$88,526 | -17.7% |
| 7.5% | $384,042.67 | -$115,957 | -23.2% |
| 8.0% | $360,040.00 | -$139,960 | -28.0% |
| 8.5% | $338,861.18 | -$161,139 | -32.2% |
| 9.0% | $320,035.56 | -$179,964 | -36.0% |
| 9.5% | $303,191.58 | -$196,808 | -39.4% |
| 10.0% | $288,032.00 | -$211,968 | -42.4% |
★ marks the cap rate closest to your result.
Typical Cap Rates by Property Type
Rough, illustrative ranges to give your result some context.
| Property Type | Typical Cap Rate Range | What It Usually Reflects |
|---|---|---|
| Single-Family Rental | 4.5% – 8% | Easy to finance and sell; returns vary a lot by neighborhood |
| Multifamily (Apartments) | 4.5% – 7% | Steady demand and diversified tenants |
| Industrial / Warehouse | 5% – 7% | Long leases and strong tenant demand in many markets |
| Self-Storage | 5.5% – 7.5% | Low operating costs, short rental terms |
| Retail | 6% – 8.5% | Depends heavily on location and anchor tenants |
| Office | 6.5% – 9% | Higher vacancy and leasing risk in many markets |
| Hotel / Hospitality | 7% – 10% | Income swings with travel demand and operating intensity |
Illustrative ranges only. Actual cap rates vary widely by city, property class, condition and the interest-rate environment — confirm local figures with a broker or appraiser.
Cap Rate Calculator: How to Figure Out Cap Rate for Any Property
A cap rate calculator turns a property's income and price into one comparable percentage, which is why investors use it as a first screen before building a full spreadsheet. Enter the purchase price, rent, vacancy and operating costs above, and the calculator works out net operating income (NOI) and the capitalization rate in one step. You can also switch tabs to solve for property value or required NOI. Because it uses standard real estate math, you can figure out cap rate for a duplex, a single-family rental or a small commercial building the same way.
What Is a Cap Rate?
Capitalization rate, or cap rate, is the annual return a property produces if you bought it with cash. If a building generates $30,000 of NOI and costs $500,000, the cap rate is 6%. It deliberately ignores your mortgage, so two buyers with different loans see the same cap rate for the same property. That is the point: it measures the property, not your financing. A higher cap rate usually means more income per dollar of price, but it often comes with more risk, a weaker location or heavier upkeep.
The Cap Rate Formula: Figure Out Cap Rate Step by Step
To figure out cap rate by hand, use one formula: cap rate equals net operating income divided by property value (or purchase price). NOI is effective gross income minus operating expenses. The cap rate calculator follows four steps:
- Add monthly rent and other income (laundry, parking, pet fees) and multiply by 12 to get gross potential income.
- Subtract vacancy to reach effective gross income (EGI).
- Subtract operating expenses: property tax, insurance, maintenance, management, utilities, HOA dues and leasing fees.
- Divide the resulting NOI by the purchase price.
Mortgage payments, depreciation and income tax are not operating expenses, so they stay out of NOI. With the default numbers above — $3,800 rent, $100 other income and 5% vacancy — NOI comes to about $28,803, which is a cap rate of roughly 5.76% on a $500,000 purchase. IRS Publication 527 lists common rental expenses and works as a useful checklist when you gather your numbers.
Using the Cap Rate Calculator to Solve for Value or NOI
The same formula rearranges. Property value equals NOI divided by the cap rate, so $30,000 of NOI at a 7% cap rate points to a value of about $428,571. Likewise, NOI equals value times cap rate, so a $600,000 property priced at a 6.5% cap rate needs $39,000 of NOI. Use the Property Value tab when you know the income and the market cap rate, and the NOI tab to see what income a price demands. The sensitivity table shows how much value moves with every half-point of cap rate.
What Is a Good Cap Rate?
There is no universal good cap rate. Many investors screen for roughly 5% to 8% on residential rentals, with lower rates in expensive, stable markets and higher rates in riskier or slower-growing ones. A higher cap rate is not automatically better: it can signal higher turnover, deferred maintenance or a neighborhood with weaker demand. Compare your result with similar properties in the same submarket rather than a national average, and treat the benchmark table above as a rough guide only. Always run the cap rate calculator at a conservative vacancy and maintenance level.
Cap Rate vs. Cash-on-Cash Return, DSCR and GRM
Cap rate ignores debt, so it works best alongside a few other ratios. Cash-on-cash return divides annual cash flow after debt service by the cash you actually invested, which makes it the better yardstick when you finance. The debt service coverage ratio (DSCR) divides NOI by annual debt service, and lenders often look for 1.20 to 1.25 or more. The gross rent multiplier (GRM) divides price by gross annual rent. When the cap rate beats the loan constant, leverage helps you; when it does not, borrowing drags returns down. Model the loan with our mortgage calculator or review the payment schedule in the amortization calculator.
Why Cap Rates Move With Interest Rates
When borrowing costs and bond yields rise, investors demand higher returns from real estate. The same NOI is then capitalized at a higher rate, which pushes values down. At $30,000 of NOI, a move from a 6% cap rate to 7% cuts the value from $500,000 to about $428,571, even though the rent has not changed. That is why a cap rate calculator result is a snapshot, not a promise. Interest-rate policy set by the Federal Reserve can change what buyers are willing to pay for the same income.
Common Mistakes When You Figure Out Cap Rate
The most common error is skipping vacancy and maintenance, which makes any property look better than it is. Others include counting mortgage payments as an expense, trusting a seller's best-case rent instead of verified leases, and ignoring a property tax reassessment after the sale. Major capital items such as a new roof do not belong in NOI, but you should still budget a reserve for them. Finally, do not mix one-time closing costs into your cap rate: they matter for cash-on-cash return, which is why the financing section above handles them separately. Use consistent assumptions every time you figure out cap rate so properties are comparable.
Limits of the Cap Rate
The cap rate is a one-year snapshot. It does not capture rent growth, appreciation, loan paydown, tax benefits or the cost of a big renovation, and it is a poor fit for short-term or heavily value-add deals where income is unstable. Treat the cap rate calculator as a fast screening tool: use it to rank properties, then dig into the details of the ones that pass. Results are estimates for educational purposes and are not financial, tax or investment advice.
Frequently Asked Questions
What is a cap rate calculator?
A cap rate calculator turns a property's income and price into one comparable percentage. You enter the purchase price, rent, vacancy and operating expenses, and it works out net operating income (NOI) and the capitalization rate. It can also solve for property value or required NOI.
How do I figure out cap rate?
To figure out cap rate, divide net operating income by the property value or purchase price. NOI is effective gross income (rent plus other income, minus vacancy) less operating expenses such as property tax, insurance, maintenance, management and utilities. Mortgage payments are not included.
What is a good cap rate for a rental property?
There is no universal good cap rate. Many investors screen for roughly 5% to 8% on residential rentals, with lower rates in expensive, stable markets and higher rates in riskier or slower-growing ones. Compare against similar properties in the same submarket rather than a national average.
Does cap rate include the mortgage?
No. Cap rate measures the property as if you bought it with cash, so mortgage payments, depreciation and income tax are excluded from NOI. To see the effect of financing, use cash-on-cash return and the debt service coverage ratio (DSCR), both shown in this calculator.
How do I calculate property value from a cap rate?
Divide annual NOI by the cap rate. For example, $30,000 of NOI at a 7% cap rate gives a value of about $428,571. Use the Property Value tab to run this calculation, and the NOI tab to find the income a property needs to justify a given price.
Why do cap rates rise when interest rates rise?
When borrowing costs and bond yields rise, investors demand higher returns from real estate. The same NOI is then capitalized at a higher rate, which lowers the value. At $30,000 of NOI, moving from a 6% to a 7% cap rate cuts the value from $500,000 to about $428,571.
What is the difference between cap rate and cash-on-cash return?
Cap rate ignores debt and divides NOI by price. Cash-on-cash return divides annual cash flow after debt service by the cash you actually invested, including your down payment and closing costs. Cash-on-cash is the better yardstick when you finance the purchase.
Which expenses count in NOI, and which do not?
NOI includes property tax, insurance, repairs and maintenance, management fees, utilities you pay, HOA dues and leasing fees. It excludes mortgage principal and interest, depreciation, income tax and major capital improvements, which are better handled with a separate reserve.