Cap Rate Calculator
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- Deal score (0–100)
- Monthly cash flow
- Cash-on-cash return
- Cap rate & DSCR
- 1%, 50%, rent/PITI rules
- Break-even occupancy
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What cap rate actually measures
Cap rate is the single cleanest way to compare rental properties because it strips out financing. Two investors looking at the same building will get very different cash-on-cash returns depending on their down payment and loan terms, but the cap rate is identical. That is what makes it the default screening metric in commercial and residential rental underwriting.
The formula
Cap Rate = Net Operating Income ÷ Purchase Price
NOI is gross rent minus vacancy and every operating expense (taxes, insurance, management, maintenance, capex reserves, utilities, HOA). Debt service is deliberately excluded. If you include your mortgage payment, you are computing cash-on-cash, not cap rate.
Why unlevered yield matters
When you compare a 5% cap in Austin to a 9% cap in Cleveland, you are comparing the raw earning power of the assets. Once you layer in financing, appreciation expectations, and tax treatment, the picture gets more complicated, but the cap rate anchors the conversation. It is also how appraisers, brokers, and lenders talk about value: price equals NOI divided by market cap rate.
Cap rate benchmarks by market type
- Tier 1 coastal metros: 3–5% is common. Appreciation and rent growth are expected to carry return.
- Sunbelt and secondary metros: 5–7% is typical for stabilized product.
- Midwest and tertiary markets: 7–10%+ is common; higher yield compensates for softer appreciation.
- Value-add or distressed: Going-in cap can be low or negative; stabilized cap is what matters.
Common mistakes
- Skipping vacancy. Using gross rent overstates NOI. Model 5–8% vacancy minimum.
- Zero management fee. Even if you self-manage, back in an 8% fee so the number survives a move or life change.
- Ignoring capex reserves. Roofs, HVAC, and paint are not maintenance; they are capex. Reserve 5–10% of rent.
- Confusing pro forma cap with in-place cap. Pro forma is what the seller wishes rents were; in-place is what leases actually pay. Underwrite both.
Glossary
- Cap Rate: NOI ÷ price. Unlevered annual yield.
- NOI: Net Operating Income. Rent minus vacancy and operating expenses, before debt service.
- In-Place Cap: Cap rate using current lease income.
- Pro Forma Cap: Cap rate using projected stabilized income.
- Cap Rate Compression: When market cap rates fall, prices rise for the same NOI.
Frequently asked questions
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Estimates only, based on the inputs you provide and third-party data. Not investment, tax, accounting, or legal advice. See our full disclaimer.