Cap Rate Calculator
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Calculate capitalization rate, NOI, GRM, and cash-on-cash return for any investment property. Compare deals side by side with the formula explained.
🏘️ Property & Income
💸 Annual Operating Expenses
🏦 Financing (for Cash-on-Cash)
Capitalization Rate
0%
📐 Cap Rate & Investment Formulas
Effective Gross Income = (Monthly Rent × 12 × (1 − Vacancy%)) + Other Income
NOI = Effective Gross Income − All Operating Expenses
Cap Rate = (NOI ÷ Purchase Price) × 100
GRM = Purchase Price ÷ Annual Gross Rent
Cash-on-Cash = (NOI − Annual Debt Service) ÷ Total Cash Invested × 100
Cap Rate Explained: The Core Metric of Real Estate Investment
The capitalization rate (cap rate) is the most widely used metric for evaluating income-producing real estate. It measures a property's expected annual return assuming you paid all cash — no mortgage. This makes it a pure, financing-neutral comparison tool. A $350,000 property generating $24,000 in NOI has a 6.86% cap rate regardless of how you finance it.
Cap Rate Benchmarks by Market Type
- Gateway cities (NYC, SF, LA, Boston): 3–5% — driven by appreciation expectations
- Major secondary markets (Atlanta, Dallas, Denver): 5–7%
- Tertiary/Midwest markets (Indianapolis, Memphis, Cleveland): 6–9%
- Distressed or rural markets: 8–12%+ (higher risk)
- Multi-family residential: typically 4–6% in strong markets
- Commercial retail/industrial: typically 5–8%
Cap Rate vs. Cash-on-Cash: Which Matters More?
Cap rate tells you the unlevered return — useful for comparing properties regardless of your financing. Cash-on-cash return tells you the yield on your actual cash invested, accounting for your mortgage. With today's higher interest rates (6.5–7.5%), many properties that show 6–7% cap rates produce negative or near-zero cash-on-cash returns with typical 25% down financing — a critical distinction the calculator above reveals.
Evaluating property investment in South Africa? Cap rate analysis for SA residential and buy-to-let property operates within a distinct cost structure — transfer duty, municipal rates, levies, and sectional title costs all affect net operating income differently from US markets. SA Property Tools provides South African property investment calculators covering these SA-specific costs, from transfer duty to rental yield and bond repayments.
The 50% Rule and 1% Rule as Quick Filters
Experienced investors use rules of thumb to quickly screen properties before detailed analysis. The 50% Rule says operating expenses (excluding mortgage) typically consume 50% of gross rent — use it to quickly estimate NOI. The 1% Rule says monthly rent should be at least 1% of purchase price ($350,000 property → $3,500/month rent) for reasonable cash flow. These rules are rough filters, not substitutes for the full analysis in this calculator.
How to Use the Cap Rate Calculator
Enter the property value
Input the current market value or purchase price of the property. For an acquisition analysis, use the asking price. For an existing holding, use a current appraisal or comparable sales estimate.
Enter gross annual rent
Input the total annual rental income at 100% occupancy. The calculator then applies a vacancy rate to arrive at effective gross income.
Enter annual operating expenses
Include all costs to run the property: property tax, insurance, maintenance and repairs, property management fees, utilities (if landlord-paid), and any HOA dues. Do not include mortgage payments — cap rate is a pre-financing metric.
Review cap rate and cash-on-cash
Cap rate tells you the unlevered return. Cash-on-cash return (when you add financing details) tells you the return on your actual cash invested — the number that matters for leveraged acquisitions.
How to Calculate Cap Rate and Cash-on-Cash Return by Hand: Worked Example
Take a rental property listed at $350,000, renting for $2,800/month, with $9,600/year in operating expenses (taxes, insurance, maintenance, management, vacancy reserve).
Step 1 — annual gross rent. $2,800 × 12 = $33,600.
Step 2 — Net Operating Income (NOI). $33,600 − $9,600 = $24,000. NOI deliberately excludes mortgage payments — it measures the property's own earning power before financing decisions.
Step 3 — cap rate. NOI ÷ purchase price = $24,000 ÷ $350,000 = 6.86%. This is the return an all-cash buyer would earn, and it's the number used to compare properties regardless of how each buyer finances the deal.
How does cash-on-cash return differ once financing enters the picture?
With 20% down ($70,000) and a 6.5%, 30-year loan on the remaining $280,000, the monthly payment is $1,769.79, or $21,237/year. Annual cash flow = NOI − debt service = $24,000 − $21,237 = $2,763. Cash-on-cash return = cash flow ÷ cash invested = $2,763 ÷ $70,000 = 3.95% — notably lower than the 6.86% cap rate, because leverage here is absorbing most of the property's income as debt service. Cash-on-cash answers "what does my actual cash earn"; cap rate answers "how good is the property, independent of how I paid for it."
What Is a Good Cap Rate, and Does It Vary by Market?
Why do cap rates differ so much between cities?
Cap rate is inversely related to buyer confidence in a market. Stable, high-demand metros (major coastal cities) often trade at 4–6% cap rates — investors accept a lower current return in exchange for perceived safety and appreciation potential. Higher-risk or slower-growth markets frequently trade at 8–12%, compensating for weaker appreciation prospects or higher tenant turnover risk. Neither number is objectively "better" — a 5% cap rate in a fast-appreciating market can outperform a 10% cap rate in a declining one once price appreciation is added to the return.
Is the 1% rule still a useful quick filter?
The 1% rule — monthly rent should equal at least 1% of purchase price — flags deals worth a full analysis. On the $350,000 example, 1% is $3,500/month; the actual $2,800 rent falls short, suggesting this deal leans on appreciation rather than cash flow. The rule is a screening heuristic, not a substitute for the NOI-based cap rate calculation above, and it has become unreliable in expensive coastal markets where almost no property clears 1%.
How does leverage change risk, not just return?
The 3.95% cash-on-cash return above assumes rent never drops and the unit stays occupied. A single unexpected vacancy month removes about $2,800 — more than the property's entire annual cash flow — which is why investors underwriting highly leveraged deals typically stress-test the cash flow against a vacancy rate of 5–8%, not just the optimistic full-occupancy scenario used for marketing.
Frequently Asked Questions
It depends on market and asset class. In gateway cities (NYC, SF), 3–5% is standard. Secondary markets: 5–7%. Midwest/tertiary: 7–10%. Most investors target 6–8% as a balanced return. Higher cap rates often mean higher risk, lower appreciation potential, or both.
Cap rate = NOI ÷ Property Value. It ignores financing. Cash-on-cash = Annual Cash Flow ÷ Total Cash Invested. Cash-on-cash reflects your actual leveraged return after mortgage payments. In a high-rate environment, a 7% cap rate property can have a 2–3% or even negative cash-on-cash return if financed at 7%+ interest.
No — cap rate is specifically a pre-financing metric. Never include mortgage principal or interest in operating expenses when calculating NOI or cap rate. That's what makes cap rate useful for comparing deals: it's financing-neutral. Use cash-on-cash return when you want to account for your specific financing terms.
GRM = Purchase Price ÷ Annual Gross Rent. A property at $350,000 with $33,600/year gross rent has a GRM of 10.4×. Lower GRM = better value. GRM under 10 is generally considered good for residential rentals. GRM is faster to calculate than cap rate (no expense data needed) but less accurate as it ignores expenses and vacancy.
Sources & Methodology
Calculations are based on the most current publicly available data from authoritative government and industry sources: