Cap rate calculator
Enter what the property collects and what it costs to run. The worksheet builds the operating statement line by line, so the cap rate arrives with its arithmetic attached rather than on its own.
Operating statement
- Enter the annual gross rental income to calculate NOI.
- Enter the purchase price to calculate a cap rate.
What the cap rate is measuring
The cap rate is the property's annual return before any financing: net operating income divided by what the property is worth. Because it ignores the loan entirely, two buyers paying wildly different interest rates on the same building compute the same cap rate — which is exactly what makes it useful for comparing buildings, and useless for comparing deals with different capital stacks.
The mistake that inflates it
Net operating income is not profit. Four things stay out of operating expenses, and leaving any of them in will pull your cap rate down while leaving them out where they belong keeps it honest:
- the mortgage payment — cap rate is financing-neutral by definition
- income taxes
- depreciation, which is not a cash cost
- capital expenditures, such as a roof or an HVAC replacement
The more common error runs the other way: dividing gross rent by the purchase price and calling it a cap rate. That produces a number roughly twice the real one and it looks entirely plausible.
Purchase price or current value?
Both are legitimate denominators and they answer different questions. Against the purchase price you get the going-in cap rate — what you are buying the income stream at. Against current market value you get where the property sits today, which is the figure to compare against market cap rates. Comparing one to the other is a category error, which is why the calculator asks rather than assuming.