Cap Rate Calculator: Formula and Property Value
Cap rate is net operating income divided by price, so it shows what a property earns before any loan. Choose whether to find the cap rate, the property value at a target cap rate, or the NOI a price implies.
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Formula
Cap rate = NOI ÷ price × 100Price = NOI ÷ (cap rate ÷ 100)NOI = price × cap rate ÷ 100
NOI is yearly income minus operating costs, before mortgage payments and income tax.
Worked example
A building earns 24,000 a year in net operating income and is priced at 400,000.
- Cap rate = 24,000 ÷ 400,000 = 6%.
- Solving for price at a 6% cap rate: 24,000 ÷ 0.06 = 400,000.
- Solving for NOI on a 500,000 property at 7.5%: 500,000 × 0.075 = 37,500.
When to use it
Use this page to value an income property or compare buildings on price versus income, ignoring financing. Use the rental yield calculator when you want vacancy and costs entered separately, the cash on cash return calculator when a loan matters, and the gross rent multiplier calculator for a quick screen from rent alone.
Second example
A shop earns 36,000 of NOI and similar buildings sell at a 7.5% cap rate. Value = 36,000 ÷ 0.075 = 480,000. If the cap rate in the area falls to 6%, the same income supports 600,000, which is why values move when rates move.
Common mistakes
- Including mortgage payments, depreciation or income tax in the costs. NOI excludes all three.
- Leaving out vacancy, repairs and management because the owner does the work. Price those hours in.
- Using the asking rent instead of rent that tenants actually pay.
- Comparing cap rates across very different property types or cities.
Frequently asked questions
What is a cap rate?
The capitalization rate is a property's yearly net operating income divided by its price. A property that earns 24,000 a year and costs 400,000 has a cap rate of 24,000 ÷ 400,000 = 6%.
What counts as net operating income?
NOI is rent and other income minus operating costs such as taxes, insurance, maintenance and management. Mortgage payments, depreciation and income tax are left out, so the cap rate ignores how the property is financed.
How do I find a price from a cap rate?
Divide the net operating income by the cap rate. With 24,000 of NOI and a 6% cap rate, the value is 24,000 ÷ 0.06 = 400,000. This is how investors estimate what a property is worth in a given market.
Is a higher cap rate better?
A higher cap rate means more income per unit of price, but it often comes with more risk, such as a weaker location or less stable tenants. Compare cap rates only between similar properties.
What is a good cap rate?
There is no single good number, because cap rates differ by market, property type and interest rates. Compare a property with similar recent sales nearby, and with your borrowing cost: a 5% cap rate on a loan at 7% means the debt costs more than the property earns.
How do I calculate a cap rate from rent and expenses?
Build the NOI first. Rent of 3,000 a month is 36,000 a year; with 5% vacancy you collect 34,200, and after 9,000 of operating costs the NOI is 25,200. On a 420,000 price the cap rate is 25,200 ÷ 420,000 = 6%.
What is the cap rate formula in Excel?
Put NOI in one cell and price in another, then divide: =B1/B2 and format the cell as a percentage. With 24,000 and 400,000, =24000/400000 returns 0.06, shown as 6%. To value a property, use =NOI/cap rate.