Cap Rate Calculator
Instantly calculate cap rate, NOI, gross rent multiplier, and monthly cash flow for any rental property — free, private, and no sign-up required.
How Cap Rate Is Calculated
The capitalization rate formula has two steps. First, calculate Net Operating Income (NOI): multiply your gross annual rent by (1 − vacancy rate) to get effective gross income, then subtract annual operating expenses. Second, divide NOI by the property value and multiply by 100 to get the cap rate percentage.
For example, a $400,000 property generating $30,000 annual rent with 5% vacancy and $8,000 expenses yields an NOI of $20,500, producing a cap rate of 5.13%. This number lets you compare properties as if you paid cash — no mortgage assumptions involved.
Cap Rate vs. Cash-on-Cash Return
Cap rate is an unlevered metric — it ignores your mortgage entirely. Cash-on-cash return, by contrast, factors in financing and measures actual cash yield on your invested equity. Use cap rate to compare properties on equal footing. Use cash-on-cash once you know your financing terms. Both metrics together give you a complete picture of investment quality.
The gross rent multiplier (GRM) shown in this calculator is an even faster screening tool. It equals property value divided by annual gross rent. A GRM under 10 typically signals a good deal in mid-tier markets, while prime urban markets often trade at GRM 15–25.
What Is a Good Cap Rate?
Cap rate benchmarks vary by market type. Class A properties in gateway cities (New York, San Francisco, Los Angeles) typically trade at 3–5% cap rates because of lower risk and high appreciation potential. Secondary markets like Phoenix, Nashville, and Austin see 5–7%. Tertiary and rural markets may yield 8–12% but carry higher vacancy and liquidity risk.
As a rule of thumb: a higher cap rate means more income relative to price, but also higher perceived risk. A lower cap rate signals a premium asset in a stable market. The "right" cap rate depends on your risk tolerance, financing costs, and local market context. Always compare to recent comparable sales in the same submarket.
Tips to Improve Your Cap Rate
You can increase cap rate by either raising NOI or paying less for the property. On the income side: reduce vacancy through responsive management, raise rents to market rate at lease renewal, and add ancillary income (parking, laundry, storage). On the expense side: shop insurance annually, implement preventive maintenance to reduce emergency repairs, and self-manage if cost-effective in your market. Even small improvements compound significantly — reducing expenses by $1,200/year on a $300,000 property improves your cap rate by 0.4 percentage points. Last updated: April 2026 using standard real estate investment formulas.
Frequently Asked Questions
What is a good cap rate for a rental property?
A cap rate between 4% and 10% is generally considered good, depending on the market. In high-demand urban areas, 4–6% is typical. In smaller cities or higher-risk markets, 8–10% or more may be expected. Always compare to local market averages.
What does cap rate mean in real estate?
Cap rate (capitalization rate) measures a property's annual net operating income as a percentage of its value. It tells you the unleveraged return you'd earn if you bought the property with cash. A higher cap rate means higher yield but often higher risk.
What is NOI in real estate?
Net Operating Income (NOI) is a property's annual income after subtracting operating expenses and vacancy losses, but before mortgage payments and taxes. It equals: (Gross Income × (1 − Vacancy Rate)) − Operating Expenses.
What expenses are included in operating expenses for cap rate?
Operating expenses typically include property management fees, insurance, property taxes, maintenance and repairs, utilities (if landlord-paid), and HOA fees. Mortgage payments and capital expenditures are NOT included in cap rate calculations.
What is the gross rent multiplier (GRM)?
GRM is the ratio of property value to annual gross rental income. It's a quick screening metric: GRM = Property Value ÷ Annual Gross Rent. Lower GRM means better value. A GRM under 10 is generally favorable for investors.
Can I use cap rate to compare different investment properties?
Yes — cap rate is one of the best tools for comparing properties because it's independent of financing. You can compare a $200K property with a 7% cap rate against a $500K property with a 5% cap rate to decide which offers better unleveraged returns.