Is a higher cap rate better?

A higher cap rate means more income per dollar of price, but it often signals more risk: an older building, a weaker location or less reliable tenants.

Does cap rate include my mortgage?

No. Cap rate measures the property, not the financing. Use cash-on-cash return to see how a loan changes your return.

What is a good cap rate?

There's no single answer. Typical cap rates differ by market, property type and condition, and they tend to move with interest rates. Compare a property with recent sales of similar rentals in the same area rather than with a national rule of thumb.

What expenses go into NOI?

The costs of operating the property: property taxes, insurance, repairs and maintenance, property management, HOA dues and any utilities the owner pays. Mortgage payments, depreciation, income taxes and major capital improvements are left out.

Investing & distressed property

Cap Rate Calculator

Cap rate compares a property's net operating income with its price, which makes it a quick way to compare rentals regardless of how they're financed. Enter the income and expenses to get the cap rate, then set a target to see the most you could pay.

Cap rate

6.50%

NOI of $19,500 a year

To hit 7%, the price would need to come down to $278,571 ($21,429 less).

Gross scheduled income: $30,000
Effective income after vacancy: $28,500
Operating expense ratio: 31.6%
Gross rent multiplier: 10.0×

What this property is worth at different cap rates

Cap rate	Implied value	Versus price
4%	$487,500	$187,500
5%	$390,000	$90,000
6%	$325,000	$25,000
7%	$278,571	-$21,429
8%	$243,750	-$56,250
9%	$216,667	-$83,333
10%	$195,000	-$105,000
12%	$162,500	-$137,500

The cap rate formula

The formula

Effective gross income

Effective income = 12 × (Rent + Other income) × (1 − Vacancy rate)

Rent: Monthly rent for the property
Other income: Monthly income such as parking, laundry or fees
Vacancy rate: The share of income you expect to lose to vacancy

Net operating income

NOI = Effective income − Operating expenses

Operating expenses: Annual taxes, insurance, maintenance, management and owner-paid utilities; not the mortgage

Cap rate

Cap rate = NOIProperty value × 100

Property value: The purchase price or current market value

Price at your target cap rate

Price = NOITarget cap rate

Target cap rate: The cap rate you want, as a decimal (7% = 0.07)

Expense ratio

Expense ratio = Operating expensesEffective income × 100

Gross rent multiplier

GRM = Property valueGross annual income

Gross annual income: 12 × (rent + other income), before vacancy

Cap rate starts from net operating income: a year's rent and other income, less a vacancy allowance, less the costs of running the property (taxes, insurance, maintenance, management and any utilities you pay). NOI leaves out mortgage payments and depreciation, which is why cap rate compares properties regardless of how they're financed.

Turning the formula around gives the most you could pay for the same NOI at your target cap rate. The calculator also shows two quick checks: the expense ratio, the share of effective income that goes to operating costs, and the gross rent multiplier, the price as a multiple of a year's gross income.

Cap rate is only as good as the income and expense figures behind it. Use actual rent rolls and expense records where you can, and keep in mind that typical cap rates vary by market, property type and interest rates.

Results are estimates for planning, not a loan offer or financial advice. Lenders, title companies and local rules set the actual figures.

Terms used in this calculator

Capitalization Rate (Cap Rate)InvestingCapitalization rate (cap rate) is a rental property's net operating income divided by its value or price. It shows the property's unleveraged annual return and is used to compare income properties.Net Operating Income (NOI)InvestingNet operating income (NOI) is a rental property's yearly income minus its operating expenses, before mortgage payments, depreciation and income taxes. It is the basis for cap rate.Cash-on-Cash ReturnInvestingCash-on-cash return is a property's annual pre-tax cash flow divided by the total cash the investor put in. It measures the yield on your own money after financing.AppraisalBuying & closingAn appraisal is a licensed appraiser's independent estimate of a property's market value. Lenders require one to make sure the home is worth at least the amount being borrowed.Comparative Market Analysis (CMA)Buying & closingA comparative market analysis (CMA) is a real estate agent's estimate of a home's value based on recent sales, pending sales and active listings of similar nearby properties.BRRRR MethodInvestingThe BRRRR method is a rental investing strategy: buy a distressed property, rehab it, rent it, refinance based on the higher value, and repeat with the cash pulled out.REO / Bank-Owned PropertyForeclosure processAn REO (real estate owned) or bank-owned property is a home a lender took back after it failed to sell at foreclosure auction. The lender then sells it, usually through a real estate agent.As-Is SaleBuying & closingAn as-is sale means the seller will not make repairs or offer credits for the property's condition. The buyer accepts the home in its current state, though inspection rights and required disclosures may still apply.

Ready to look at real foreclosures?

Browse foreclosures across the country on RealtyTrac, with property details, estimated values and foreclosure status.

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Frequently Asked Questions

Guides to read next

How to Evaluate a Pre-Foreclosure DealGuide · 6 min readOnce an owner is interested in selling, you can replace rough screening estimates with real numbers. This guide walks through confirming what is owed, finding every lien, assessing condition and repairs, estimating value, and turning those figures into a maximum price you will not go above.Inspecting and Negotiating on a Bank-Owned (REO) PropertyGuide · 7 min readBank-owned homes are sold as-is, often after sitting vacant, so a thorough inspection is the most important step in the purchase. This guide covers how to get the home ready to inspect, what to look for, what banks will and will not negotiate and how to handle appraisal and title issues before closing.How to Finance a Foreclosure or Distressed PropertyGuide · 7 min readDistressed properties are harder to finance than move-in-ready homes. Condition, timing and the seller's terms all limit which loans will work. This guide matches financing options to each kind of distressed purchase and explains the trade-offs.

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Rental Property ROI CalculatorCash flow, NOI, cap rate and cash-on-cash return for a rental.Fix and Flip CalculatorProfit, ROI and a 70% rule check on a flip.Foreclosure Auction Bid CalculatorYour walk-away bid for a foreclosure auction.

Disclaimer: The information on this page is for general educational purposes only and is not legal, financial, tax or investment advice. Laws, lending rules and market conditions vary by state and change over time, and any figures shown are estimates. Before you buy, sell, finance or bid on a property, consult a qualified attorney, financial advisor, lender or licensed real estate professional about your situation.