Calculators
Cap rate calculator
Capitalization rate measures what a property earns relative to its price, with financing removed from the picture entirely — useful for comparing two deals regardless of how either one gets funded.
Run the numbers
Vacancy and operating-expense ratio are assumptions — set them to match the property.
Cap rate has no universal "good" number — what's strong depends on the market, the property type and current rates. This tool computes the ratio; it does not tell you whether it's attractive for a given market.
What cap rate is and how it's computed
Cap Rate = Annual Net Operating Income ÷ Price (or Value). Net operating income is effective gross income — rent plus any other income, minus vacancy and credit loss — minus operating expenses, before any mortgage payment. A property with $21,594 of annual NOI on a $350,000 price has a cap rate of roughly 6.2%. Financing is deliberately absent from both sides of the equation, which is what makes cap rate useful for comparing an all-cash deal to a heavily leveraged one on equal terms.
How it's used in an underwriting decision
Cap rate is primarily a valuation and comparison tool, not a residential DSCR lender's qualification metric — DSCR lenders qualify on gross rent against the payment (see the DSCR calculator), not on cap rate. Where cap rate matters in financing is upstream of that: it's how an investor or an appraiser using the income approach judges whether the asking price is reasonable relative to what the property actually produces, before the loan structure is even discussed. A property priced well below the cap rate the market is paying for similar assets is either underpriced or has a problem the price is compensating for.
What this doesn't capture
- Financing at all. That's the point of the metric, but it also means cap rate says nothing about your actual cash-on-cash return once a mortgage is layered on — that's a separate calculation on the cash flow calculator.
- Trailing versus pro forma NOI. A cap rate is only as honest as the NOI behind it. Listing packages frequently quote a pro forma NOI at full occupancy and optimistic expenses — run this tool on the trailing twelve months' actual numbers where you can get them, not the seller's projection.
- Property condition or upside. Two properties at the same cap rate can have very different capital needs or rent-growth potential that the ratio alone doesn't show.
- What "good" means locally. Cap rates vary by market and property class; this tool has no opinion on whether the result is attractive where you're buying.
Read the full definition, including the trailing-versus-pro-forma trap in more detail, on the cap rate glossary entry.