People type this into search every day: cap rate calculator.
A cap rate is net operating income divided by the property price. Freddie Mac Multifamily’s capitalization rate guidance writes the income approach the other way: NOI ÷ overall capitalization rate = value, or I / R = V. Flip that and the cap rate is NOI ÷ price.
HUD’s income-approach chapter treats the income being capitalized as annual net income after operating expenses. Debt service is not part of that net income. The mortgage stays out.
The cap rate calculator uses this:
EGI = gross annual rent × (1 − vacancy)
NOI = EGI − operating expenses
Cap rate = NOI ÷ property value
These are labeled examples. They are not an appraisal, and they are not personalized financial advice.
What goes in the expenses
Operating expenses on this page are the recurring costs of running the building: tax, insurance, management, repairs, utilities you pay. Vacancy comes off the rent before those costs.
Leave out the mortgage payment, depreciation, and income tax. A new roof that you pay once is a capital project, not a year of operations. If the rent figure is already what you collected, set vacancy to 0 so you do not subtract an empty unit twice.
Fig 1
From rent to a cap rate
The loan is not in this chain
Vacancy comes off gross rent. Operating expenses come off next. What remains, divided by price, is the cap rate.
Example 1: the calculator defaults
Inputs:
- gross annual rent: $28,800
- vacancy and credit loss: 6%
- annual operating expenses: $7,440
- price: $420,000
That rent is $2,400 a month if you want the monthly picture: 2,400 × 12 = 28,800.
Vacancy: 28,800 × 0.06 = $1,728.00
Effective gross income: 28,800 × (1 − 0.06) = 28,800 × 0.94 = $27,072.00
NOI: 27,072 − 7,440 = $19,632.00
NOI per month: 19,632 ÷ 12 = $1,636.00
Cap rate: 19,632 ÷ 420,000 = 0.04674, which the page rounds to 4.7%
Calculator result
Capitalization rate
- Gross annual rent
- $28,800.00
- Vacancy and credit loss
- 6%
- Annual operating expenses
- $7,440.00
- Property value or price
- $420,000.00
4.7%
overall capitalization rate
- Effective gross income
- $27,072.00
- Net operating income
- $19,632.00
- NOI per month
- $1,636.00
Of the $28,800 in gross rent, the NOI is 19,632 ÷ 28,800 = 68.2%. Expenses are 7,440 ÷ 28,800 = 25.8%. Vacancy is 6.0%. Those three shares add to 100.
Fig 2 · 1/3
Where the $28,800 of rent goes
Defaults. Vacancy 6%, expenses $7,440, price $420,000.
NOI
$19,632.00
Expenses
$7,440.00
Vacancy
$1,728.00
NOI is $19,632.00, which is 68.2% of gross rent.
Operating expenses take $7,440.00. Vacancy takes the other $1,728.00.
Example 2: $36,000 of rent on a $480,000 price
Inputs: gross rent $36,000, vacancy 8%, operating expenses $12,000, price $480,000.
Effective gross income: 36,000 × 0.92 = $33,120.00
NOI: 33,120 − 12,000 = $21,120.00
NOI per month: $1,760.00
Cap rate: 21,120 ÷ 480,000 = 0.044, which is 4.4%
Calculator result
Capitalization rate
- Gross annual rent
- $36,000.00
- Vacancy and credit loss
- 8%
- Annual operating expenses
- $12,000.00
- Property value or price
- $480,000.00
4.4%
overall capitalization rate
- Effective gross income
- $33,120.00
- Net operating income
- $21,120.00
- NOI per month
- $1,760.00
NOI is higher than Example 1 by 21,120 − 19,632 = $1,488.00. The price is higher by $60,000. The cap rate falls from 4.7% to 4.4% because the price rose by more than the NOI.
Example 3: a duplex with $54,000 of rent
Inputs: gross rent $54,000, vacancy 5%, expenses $14,000, price $650,000.
That rent is $4,500 a month across both units: 4,500 × 12 = 54,000.
Effective gross income: 54,000 × 0.95 = $51,300.00
NOI: 51,300 − 14,000 = $37,300.00
NOI per month: 37,300 ÷ 12 = $3,108.33
Cap rate: 37,300 ÷ 650,000 = 0.05738, shown as 5.7%
The expense ratio is quieter here. 14,000 ÷ 51,300 = 27.3% of effective rent, against 7,440 ÷ 27,072 = 27.5% in Example 1. The cap rate is higher mostly because $37,300 of NOI is a larger share of a $650,000 price than $19,632 is of $420,000.
Example 4: a condo at $220,000
Inputs: gross rent $18,000, vacancy 4%, expenses $5,200, price $220,000.
Monthly rent behind that annual figure: 18,000 ÷ 12 = $1,500.
Effective gross income: 18,000 × 0.96 = $17,280.00
NOI: 17,280 − 5,200 = $12,080.00
NOI per month: $1,006.67
Cap rate: 12,080 ÷ 220,000 = 0.05491, shown as 5.5%
This is a smaller building with a lower vacancy allowance. The cap rate lands close to the duplex. The dollars are not close. NOI is $12,080 here and $37,300 there. Read the percent, then read the NOI in money. A similar rate on a thin NOI is a smaller stream of cash.
Example 5: what if vacancy doubles
Hold Example 1 and change vacancy from 6% to 12%. Rent, expenses, and price stay put.
Effective gross income: 28,800 × 0.88 = $25,344.00
The extra vacancy costs 27,072 − 25,344 = $1,728.00 of effective rent. That is another 6% of $28,800.
NOI: 25,344 − 7,440 = $17,904.00
Cap rate: 17,904 ÷ 420,000 = 0.04263, shown as 4.3%
NOI fell by 19,632 − 17,904 = $1,728.00, the same dollars the vacancy took, because expenses did not change. The cap rate fell from 4.7% to 4.3%.
Example 6: the same NOI at a $350,000 price
Use Example 1’s income again. NOI stays $19,632.00. Price drops to $350,000.
Cap rate: 19,632 ÷ 350,000 = 0.05609, shown as 5.6%
Nothing about the building’s operations changed. The rate moved because the denominator moved.
Example 7: the same NOI at a $500,000 price
NOI still $19,632.00. Price $500,000.
Cap rate: 19,632 ÷ 500,000 = 0.03926, shown as 3.9%
From Example 6 to this one, the price rose by $150,000 and the cap rate fell from 5.6% to 3.9%. Same rent, same vacancy, same expenses.
Fig 3 · 1/3
Same NOI, three prices
$19,632 of NOI. Only the price changes.
Cap rate
- Cap rate
| Category | Cap rate |
|---|---|
| $350k | 5.6% |
| $420k | 4.7% |
| $500k | 3.9% |
At $350,000 the cap rate is 5.6%.
At $420,000 it is 4.7%. At $500,000 it is 3.9%.
Example 8: the rent is already collected
Suppose the $28,800 in Example 1 is money that actually arrived, and you also type a 6% vacancy. You have subtracted empty units twice.
Set vacancy to 0. Keep expenses at $7,440 and the price at $420,000.
Effective gross income: $28,800.00
NOI: 28,800 − 7,440 = $21,360.00
Cap rate: 21,360 ÷ 420,000 = 0.05086, shown as 5.1%
Against Example 1, NOI is higher by $1,728.00 and the cap rate is 5.1% instead of 4.7%. If the rent box is a lease amount you hope to collect, keep the vacancy. If it is last year’s deposits, take the vacancy back out.
Example 9: the mortgage does not belong in the expenses
Example 1’s NOI is $19,632.00. The mortgage payment post uses a $336,000 loan at 6.25% for 30 years on a $420,000 price, with principal and interest of $2,068.81 a month. A year of that payment is 2,068.81 × 12 = $24,825.72.
Fold that debt service into the expenses and the leftover is:
19,632 − 24,825.72 = −$5,193.72
Divided by the $420,000 price: −5,193.72 ÷ 420,000 = −1.2%
The cap rate calculator will not do this step, because the expense field is not a mortgage. I did it beside the formula so the mix-up is visible. The building’s NOI is still $19,632. The loan is a financing choice on top of that.
Cash after the mortgage is a different question. Use the rental property cash flow calculator when you want the leftover after the payment. Cap rate does not move when you change the loan. The payment does.
Example 10: expenses above the rent
Inputs: gross rent $24,000, vacancy 8%, expenses $26,000, price $400,000.
Effective gross income: 24,000 × 0.92 = $22,080.00
NOI: 22,080 − 26,000 = −$3,920.00
NOI per month: −$326.67
Unrounded cap rate: −3,920 ÷ 400,000 = −0.98%. The page rounds to one decimal and prints −1%.
Calculator result
Capitalization rate
- Gross annual rent
- $24,000.00
- Vacancy and credit loss
- 8%
- Annual operating expenses
- $26,000.00
- Property value or price
- $400,000.00
-1%
negative capitalization rate
- Effective gross income
- $22,080.00
- Net operating income
- -$3,920.00
- NOI per month
- -$326.67
A negative NOI means the operations spend more than they collect, before any mortgage. Dividing a negative number by the price keeps the sign. The percent is a warning about the year’s income, not a yield you can compare with a savings account.
Example 11: what price a cap rate implies
Freddie’s line is value = NOI ÷ cap rate. Take Example 1’s NOI of $19,632.00 and try three rates. This is the same formula, solved for price. It is not a sale price from the market.
At 8%: 19,632 ÷ 0.08 = $245,400.00
At 6%: 19,632 ÷ 0.06 = $327,200.00
At 5%: 19,632 ÷ 0.05 = $392,640.00
The NOI did not change. Moving the rate from 8% to 5% moves the implied price by 392,640 − 245,400 = $147,240.00.
Fig 4 · 1/3
Price implied by $19,632 of NOI
Value = NOI ÷ cap rate. Same income, three rates.
Implied price
8% cap
$245,400
6% cap
$327,200
5% cap
$392,640
At 8% the implied price is $245,400.
At 6% it is $327,200.
At 5% it is $392,640.
You can also solve for the rent that would produce a chosen rate at a chosen price. Say you want a 6% cap on the $420,000 default price, with the same $7,440 of expenses and 6% vacancy.
Target NOI: 0.06 × 420,000 = $25,200.00
Effective rent that covers NOI plus expenses: 25,200 + 7,440 = $32,640.00
Gross rent before 6% vacancy: 32,640 ÷ 0.94 = $34,723.40
That is 34,723.40 ÷ 12 = $2,893.62 a month, against the $2,400 a month that produced the 4.7% default. Check it: 34,723.40 × 0.94 = 32,640.00, then 32,640 − 7,440 = 25,200, and 25,200 ÷ 420,000 = 0.06.
The examples side by side
| Example | Gross rent | Vacancy | Expenses | Price | NOI | Cap rate |
|---|---|---|---|---|---|---|
| 1. Defaults | $28,800 | 6% | $7,440 | $420,000 | $19,632.00 | 4.7% |
| 2. Guide case | $36,000 | 8% | $12,000 | $480,000 | $21,120.00 | 4.4% |
| 3. Duplex | $54,000 | 5% | $14,000 | $650,000 | $37,300.00 | 5.7% |
| 4. Condo | $18,000 | 4% | $5,200 | $220,000 | $12,080.00 | 5.5% |
| 5. Vacancy 12% | $28,800 | 12% | $7,440 | $420,000 | $17,904.00 | 4.3% |
| 6. Lower price | $28,800 | 6% | $7,440 | $350,000 | $19,632.00 | 5.6% |
| 7. Higher price | $28,800 | 6% | $7,440 | $500,000 | $19,632.00 | 3.9% |
| 8. Vacancy already out | $28,800 | 0% | $7,440 | $420,000 | $21,360.00 | 5.1% |
| 9. Mortgage folded in | $28,800 | 6% | includes $24,825.72 debt | $420,000 | −$5,193.72 | −1.2% |
| 10. Expenses above rent | $24,000 | 8% | $26,000 | $400,000 | −$3,920.00 | −1% |
| 11. Price at a 6% cap | NOI $19,632 | $327,200 | $19,632.00 | 6% by construction |
Example 9 is the mistake, not a result from the cap rate field. Example 11 is the formula solved for price.
Open the cap rate calculator with the rent, the vacancy you believe, the operating costs, and the price. If the question is whether to rent or buy the house you live in, that is a different model, in should I rent or buy this house?. The loan payment that Example 9 kept out of NOI is in how is a mortgage payment calculated?.