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A 480,000 rental with 36,000 of rent
Enter 36,000 of gross annual rent, an 8% vacancy allowance, 12,000 of operating costs, and a 480,000 price. Operating costs are tax, insurance, management, and repairs. Leave the loan payment out.
Gross annual rent: 25% lower
Change gross annual rent to 27,000 while keeping the other example values the same.
Gross annual rent: 25% higher
Change gross annual rent to 45,000 while keeping the other example values the same.
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Quick answer
What does the Capitalization rate calculate?
What cap rate follows from this rental’s net operating income and price? This calculator uses gross annual rent, vacancy and credit loss, annual operating expenses, and property value or price to estimate noi as a percent of price immediately in your browser.
With the values currently entered, the result is 4.7% — overall capitalization rate. It also shows effective gross income, net operating income, and noi per month.
How to use the Capitalization rate
- Replace the example values with your own numbers.
- Review the result and supporting figures as they update automatically.
- Check the formula and assumptions before using the estimate for a decision.
Inputs used
- Gross annual rent
- Vacancy and credit loss — entered in %
- Annual operating expenses
- Property value or price
Capitalization rate formula
EGI = gross annual rent × (1 − vacancy). NOI = EGI − operating expenses. Cap rate = NOI ÷ property value.
Assumptions
- Freddie Mac writes the income approach as NOI ÷ overall capitalization rate = value. Rearranged, the cap rate is NOI divided by the price you type.
- Operating expenses exclude mortgage payments, depreciation, and income tax. Vacancy is taken off gross rent before those expenses.
Verify the inputs
Authoritative sources
These sources explain the definitions, factors, or rules behind this tool. Their geographic scope is shown because an official source for one country is not automatically valid somewhere else.
Writes the income approach as NOI ÷ overall capitalization rate = value (I / R = V). The cap rate is therefore NOI divided by price.
Income approach to valueUS Department of Housing and Urban DevelopmentScope: HUD Handbook 4465.1 Chapter 7Treats annual net income after operating expenses as the income that capitalization converts into value. Debt service is not part of that net income.
Sources do not endorse Calculum. Check the source date, scope, and your own documents before making a financial, tax, insurance, or reporting decision.
Practical guide
Capitalization rate example and edge cases
A cap rate is net operating income divided by the property price. Freddie Mac writes that as I / R = V. Mortgage payments stay out of NOI, so this is a yield before financing.
Example: A 480,000 rental with 36,000 of rent
Enter 36,000 of gross annual rent, an 8% vacancy allowance, 12,000 of operating costs, and a 480,000 price. Operating costs are tax, insurance, management, and repairs. Leave the loan payment out.
- Gross annual rent
- 36,000
- Vacancy and credit loss
- 8 %
- Annual operating expenses
- 12,000
- Property value or price
- 480,000
Calculated result4.4%overall capitalization rate
If you want the leftover after the mortgage, open the rental property cash flow calculator. Cap rate answers a different question: what yield the price implies before debt.
Example results use the default display profile. The calculator above follows your selected country and units.
How to read the result
- Read the percent first. Then check NOI. A high cap rate with thin NOI can still be a tired building.
- Vacancy comes off rent before expenses. If you already typed collected rent, set vacancy to 0 so you do not subtract it twice.
Edge cases worth checking
The building needs a new roof next year
A capital project is not an operating expense in this NOI. Raise expenses only for the recurring year. A one-off roof belongs in a separate cash plan.
You bought with a large loan
Keep the mortgage out of this calculator. Cap rate does not move when the loan does. Cash flow after the payment is the other tool.
What changes the result most
Gross annual rent
Use a current amount for gross annual rent. Include fees or recurring costs that belong in the same figure.
Vacancy and credit loss
Test a lower and higher vacancy and credit loss. A small percentage change can move the final result more than expected.
Annual operating expenses
Use a current amount for annual operating expenses. Include fees or recurring costs that belong in the same figure.
Try a different scenario
Small changes show whether the answer is stable or sensitive.
Gross annual rent: 25% lower
27,0002.7%overall capitalization rate
Gross annual rent: 25% higher
45,0006.1%overall capitalization rate
Vacancy and credit loss: 25% higher
10 %4.3%overall capitalization rate
Common mistakes
Check gross annual rent
Freddie Mac writes the income approach as NOI ÷ overall capitalization rate = value. Rearranged, the cap rate is NOI divided by the price you type. Make sure this matches the number you enter.
Keep property value or price consistent
Operating expenses exclude mortgage payments, depreciation, and income tax. Vacancy is taken off gross rent before those expenses. Use the same units and time period throughout the calculation.
Do not rely on one capitalization rate scenario
Run a cautious case and an optimistic case. The range is often more useful than one exact-looking number.
Use this result well
What cap rate follows from this rental’s net operating income and price?
It cannot replace a lender quote, lease, survey, or purchase contract.