Cap Rate Calculator
Evaluate real estate investments in seconds. Calculate your Net Operating Income (NOI) and see your property's Capitalization Rate on our dynamic yield gauge.
Quick Answer: What is a Cap Rate?
The Capitalization Rate (Cap Rate) is the fundamental metric used by real estate investors to compare the profitability of different properties. It is calculated by dividing the property's Net Operating Income (NOI) by its current market value. Crucially, the Cap Rate measures the unlevered return on the property, meaning it mathematically assumes the property was bought entirely in cash and strictly excludes mortgage payments from the calculation.
Capitalization Rate
Note: Cap rate formulas strictly exclude mortgage payments (debt service). Do not subtract your mortgage from the NOI.
Valuation & Income
Operating Expenses
Annual Cash Flow Waterfall
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Why Exclude the Mortgage?
Many beginner investors get confused when learning to calculate Cap Rate because they want to subtract their monthly mortgage payment as a "business expense." You must not do this.
Cap Rate evaluates the property itself, not the specific way you chose to finance it. If two investors buy identical duplexes next door to each other, but Investor A pays all cash and Investor B uses a high-interest mortgage, the properties themselves still have the exact same Cap Rate. The intrinsic yield of the brick-and-mortar structure hasn't changed.
Cap Rate
Used to evaluate how good the "deal" is relative to the market. Formula: NOI / Property Value.
Cash-on-Cash Return
Used to evaluate how hard your specific liquid cash is working. This metric DOES include your mortgage and is calculated as: (NOI - Debt Service) / Total Cash Invested.
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Frequently Asked Questions
How is Cap Rate (Capitalization Rate) calculated?
Cap rate is calculated by dividing the property's Net Operating Income (NOI) by its current market value or purchase price. For example, if a property generates $50,000 in NOI and costs $1,000,000, the cap rate is 5%.
What is a "good" cap rate?
A "good" cap rate depends heavily on the asset class and location. Generally, a cap rate between 4% and 8% is considered healthy in an average market. A lower cap rate (e.g., 3%) usually indicates a lower-risk investment in a highly desirable area (like a prime NYC apartment). A higher cap rate (e.g., 10%+) indicates higher yield but usually comes with much higher risk (such as a volatile class-D neighborhood).
Should I include my mortgage payment in the cap rate calculation?
No. You must absolutely exclude the mortgage payment (debt service) when calculating NOI and Cap Rate. Cap Rate measures the unlevered yield of the property itself, as if you bought it entirely with cash. If you include your specific mortgage terms, you are calculating "Cash-on-Cash Return", not Cap Rate.
What is Net Operating Income (NOI)?
Net Operating Income (NOI) is the total income a property generates minus all operating expenses required to run it. Operating expenses include property taxes, insurance, maintenance, property management, and expected vacancy losses. It does NOT include capital expenditures (like replacing a roof) or debt service.
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