Cap Rate Calculator — NOI, Yield & Reverse Price Lookup
Enter your property's income and annual expenses to instantly calculate cap rate, NOI, gross yield, and the maximum price you should pay to hit your target return. No signup required.
Property Details
Property
Annual Expenses
Reverse Calculator
Set your desired cap rate to see the maximum price you should pay.
Cap Rate
8.4%
High Yield
Strong returns, but often signals higher risk, turnover, or a weaker market.
NOI
$25,200
Net Operating Income/yr
Gross Yield
12.0%
Gross income / property value
Expense Ratio
26.3%
Expenses / effective income
Effective Income
$34,200
After vacancy loss
Total Expenses
$9,000
Annual operating expenses
Annual Expense Breakdown
Reverse Calculator
What price gives you a 8.0% cap rate with this income and expense profile?
Maximum Purchase Price
$315,000
Cap Rate Formula — Step by Step
The capitalization rate formula is straightforward: divide your property's Net Operating Income (NOI) by its current market value, then multiply by 100 to express it as a percentage.
Step 1 — Calculate Gross Annual Income. Add up all rent collected over a year. For a single-family rental charging $2,000/month, that is $24,000 gross.
Step 2 — Subtract Vacancy Loss. Multiply gross income by your vacancy rate. A 5% vacancy on $24,000 is $1,200, leaving $22,800 of effective gross income (EGI).
Step 3 — Subtract Operating Expenses. Add property taxes, insurance, maintenance, property management fees, and any other recurring costs. Do not include the mortgage payment — cap rate is a financing-independent metric.
Step 4 — Divide NOI by Property Value. If NOI is $14,400 and the property is worth $240,000, the cap rate is $14,400 / $240,000 = 0.06, or 6.0%.
Worked example. You are evaluating a duplex listed at $320,000 with $28,800 in gross annual rent, 5% vacancy, $3,200 in property taxes, $1,600 in insurance, and $2,880 in maintenance. EGI = $27,360. Operating expenses = $7,680. NOI = $19,680. Cap rate = $19,680 / $320,000 = 6.15%.
What is a Good Cap Rate for Rental Property?
Whether a cap rate is "good" depends entirely on your market, property type, and investment goals. There is no universal answer, but here are the ranges most experienced investors use as benchmarks:
- Below 4% — Low risk, low return. Common in gateway cities like New York, San Francisco, and Boston. Investors accept compressed yields in exchange for long-term appreciation potential and stable occupancy.
- 4–6% — Healthy and balanced. The sweet spot for most residential real estate investors. Strong enough to generate positive cash flow while still reflecting a quality asset in a solid market.
- 6–8% — Above-average yield. Typical of secondary markets, Midwest cities, or value-add acquisitions. Often achievable through forced appreciation or buying below market. Higher return but requires more active management.
- 8–12% — High yield territory. Properties in economically challenged areas, student housing, or those requiring significant renovation. The risk of vacancy, deferred maintenance, and capital expenditures is meaningfully higher.
A common mistake is chasing the highest cap rate available. A 12% cap rate can look attractive on paper but evaporate quickly when a roof needs replacing or vacancy climbs to 20%. Always stress-test your numbers with a realistic vacancy assumption and a capital expenditure reserve before comparing cap rates across markets.
Cap Rate vs ROI — Which to Use When
Cap rate and return on investment (ROI) are often confused because both measure profitability — but they answer different questions.
| Metric | Includes Mortgage? | Best Used For |
|---|---|---|
| Cap Rate | No — financing-independent | Comparing properties across markets or financing structures |
| Cash-on-Cash ROI | Yes — reflects leverage | Measuring actual cash return on your out-of-pocket investment |
| Total ROI | Yes — plus equity buildup | Long-term wealth building analysis including appreciation |
Use cap rate when comparing properties. Because it ignores financing, cap rate levels the playing field. You can compare a property you would pay all cash versus one you would finance 80% — the cap rate is the same regardless.
Use cash-on-cash ROI when evaluating a specific deal. Once you know your financing terms, cash-on-cash tells you the real return on the cash you actually deploy. Leverage can dramatically boost this number — or make it deeply negative if the interest rate exceeds the cap rate (negative leverage).
The cap rate vs interest rate spread matters. If a property has a 6% cap rate and you finance it at 7.5% interest, you are in negative leverage territory — the property earns less than it costs to borrow. Every dollar you borrow reduces your return. This is why many investors today target cap rates at or above their financing rate, or focus on properties with significant value-add upside.
For a comprehensive picture, use cap rate as your screening filter, then run full cash-on-cash and total ROI calculations once a deal passes the initial screen. Our rental property calculator handles all three metrics in one place.
Average Cap Rates by Property Type
Cap rate benchmarks vary significantly by property class. These are general national ranges — local market conditions can shift these materially in either direction.
| Property Type | Typical Cap Rate Range | Notes |
|---|---|---|
| Single-Family Rental (urban) | 3.5–5.5% | Strong appreciation markets; low turnover |
| Single-Family Rental (suburban/secondary) | 5–8% | Midwest, Southeast, and Sun Belt secondary cities |
| Small Multifamily (2–4 units) | 5–7% | Residential pricing; scale slightly with unit count |
| Mid-size Multifamily (5–50 units) | 5–7.5% | Institutional interest compresses yields in many markets |
| Short-Term Rental / Airbnb | 6–12% | Wide range; highly location and seasonality dependent |
| Student Housing | 6–9% | Higher turnover and management intensity offset by yield |
| Retail / Strip Mall | 6–8% | Varies sharply by tenant credit quality and lease terms |
Source: Aggregated from CoStar, CBRE, and RCA market reports. Ranges represent stabilized assets in secondary and tertiary markets; trophy assets in gateway cities frequently trade below these ranges.
How to Use the Cap Rate Reverse Calculator
The reverse calculator answers one of the most practical questions in real estate: "Given this property's income and expenses, what is the most I should pay to hit my target cap rate?"
The math is simply the inverse of the cap rate formula:
For example, if a property generates $18,000 NOI and you want a minimum 7% cap rate: $18,000 / 0.07 = $257,143. If the seller is asking $300,000, the deal only pencils at a 6% cap rate — below your target.
This is an extremely useful tool when negotiating. Instead of arguing about price in the abstract, you can walk into any negotiation with a specific, mathematically derived maximum offer tied to your required return. The calculator above updates this number in real time as you adjust the target cap rate slider.
Combining the reverse calculator with a DSCR analysis and cash-on-cash return gives you a complete picture of whether a deal works under your specific financing terms. Many investors set a cap rate floor (e.g., at least 5.5%) as the entry filter, then verify cash-on-cash ROI exceeds their hurdle rate (e.g., at least 8%) before making an offer.
Frequently Asked Questions
Does cap rate include the mortgage payment?
No. Cap rate is calculated using Net Operating Income, which excludes the mortgage payment and debt service. This makes it a financing-independent metric — the same property has the same cap rate whether you pay all cash or take out a loan. This is why cap rate is useful for comparing properties across different financing scenarios or investor situations.
What is the difference between cap rate and gross yield?
Gross yield divides annual gross rent (before any expenses) by the property value. Cap rate divides NOI (after all operating expenses, but before debt service) by the property value. Gross yield is a quick, rough screen. Cap rate is the more accurate and widely used measure of a property's true income potential.
Should I use purchase price or current market value?
It depends on the purpose. When evaluating a potential acquisition, use the asking price (or your offer price) — this is called the "going-in cap rate." When benchmarking your existing portfolio or comparing against comps, use the current market value. The distinction matters because appreciation changes the cap rate on your cost basis versus the cap rate at current value.
Can a property have a negative cap rate?
Technically yes — if operating expenses exceed effective income, NOI becomes negative, and so does the cap rate. This happens with properties that are over-rented, have unusually high expense structures, or are vacant and being held for appreciation. In practice, a negative cap rate is a signal that the property should not be evaluated as an income investment in its current state.
How does cap rate change as interest rates rise?
Rising interest rates typically push cap rates higher over time — buyers demand more income yield as borrowing costs increase, so property prices compress relative to income. However, the relationship is not immediate or mechanical; strong rental demand, low supply, and inflation-driven rent growth can keep cap rates low even as financing costs rise. The spread between cap rates and the 10-year Treasury is a common institutional benchmark for evaluating whether real estate is attractively priced.
Want a full cash flow and mortgage analysis? Try our Rental Property Calculator
|Evaluate your loan qualification: DSCR Calculator
|Measure your cash return: Cash-on-Cash Calculator