Cap Rate Calculator

Cap rate measures a property's unleveraged return — what the property earns relative to its value, before any financing. It is calculated as net operating income divided by property value. Because it ignores your loan, two buyers paying the same price for the same building share the same cap rate even if one pays cash and the other borrows 75 percent.

Net operating income deliberately excludes mortgage payments, depreciation, income taxes, and capital expenditures. That is what makes cap rate useful for comparing properties to one another and to the broader market — and also what makes it incomplete on its own.

A higher cap rate generally signals higher expected return and higher perceived risk; a lower cap rate often reflects a stronger location, stronger tenancy, or stronger demand. Cap rate says nothing about your monthly cash flow after debt service — for that, look at the Cash-on-Cash Return Calculator.

The operating expense ratio shown above compares expenses to effective gross income. If it looks unusually low, confirm that taxes, insurance, management, and realistic maintenance reserves are all included.