How this calculator works
It follows the income approach appraisers and county assessors use: start with the rent the property could collect, subtract what it will lose and what it costs to run, and the result is net operating income (NOI). Dividing NOI by price gives the cap rate. Dividing NOI by a cap rate gives a value.
What goes into NOI, and what stays out
NOI is the property's income after the ordinary costs of running it, and before the mortgage. Loan payments, depreciation and the owner's income taxes are not operating expenses, so they never belong in a cap rate. That is what makes the cap rate a measure of the property rather than of one buyer's financing.
Reserves for replacement are the one item practitioners treat differently. Some appraisers and assessors deduct them as an expense; others, and most sale listings, leave them out, which makes the NOI and cap rate look higher. Set reserves to 0 when you compare your numbers with a source that leaves them out.
Using value from cap rate
The same formula works backward. If similar properties in the area have sold at around a 6.5% cap rate, a property with $39,000 of NOI is worth about $39,000 ÷ 0.065 = $600,000 to a buyer who wants that return. The lower the market cap rate, the higher the value of each dollar of NOI, which is why a small change in either number moves the price a lot.
Check the seller's NOI
Listing cap rates are often built on the seller's figures: current taxes that may rise when the property sells and is reassessed, no vacancy, no management fee and no reserves. Re-enter the deal with your own numbers before you compare it with anything.
What this does not model
Financing, cash flow and return on your cash are not included; the rental cash flow calculator adds the mortgage. It also uses a single year of stabilized income, so it does not capture rent growth, lease-up of vacant units, or major repairs needed at purchase.
Frequently asked questions
What is a good cap rate?
There is no single answer. Cap rates move with interest rates, location, property type and condition. Newer buildings in strong areas often trade at lower cap rates, while older or riskier properties need higher ones to attract buyers. Compare a deal with recent sales of similar properties nearby rather than with a national rule of thumb.
Does the mortgage payment count in the cap rate?
No. Cap rate uses net operating income, which is measured before any loan payments. Two buyers paying the same price see the same cap rate whether they pay cash or borrow 80%. To include financing, look at cash flow and cash-on-cash return instead.
Should I use the purchase price or market value?
To judge a purchase, use the price you would pay plus any immediate repairs you must make. To estimate what a property you own is worth, use current market value, or work backward from a market cap rate with the value field.
Why is my cap rate lower than the listing's?
Listings often show the best-case NOI: no vacancy, no management fee, no reserves and the seller's current property taxes. Adding realistic figures for each of these commonly lowers the cap rate by a point or more.
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Results are estimates based on the numbers you enter and simplified assumptions. They are not financial, tax, lending or legal advice. Confirm figures with your lender, accountant, attorney or the relevant county before you commit money.