Short answer
Cap rate is a property's annual net operating income (NOI) divided by its price, times 100. NOI is rent after vacancy minus operating costs, before any mortgage payment. A $200,000 rental with $12,732.00 of NOI has a 6.37% cap rate, whether you pay cash or borrow.
- Cap rate = annual NOI / purchase price x 100. The mortgage is never part of NOI.
- $120,000 of NOI on a $1,000,000 building is a 12% cap rate.
- The same $200,000 house reads 8.31%, 6.37% or 5.18% depending only on vacancy, management and CapEx assumptions.
- Value from a target cap rate: NOI / cap rate. $12,732 of NOI at 7% supports $181,885.71.
On this page
- What is the formula for a cap rate?
- Cap rate calculator for rental property
- How do you calculate cap rate? Worked example
- How vacancy, management and CapEx assumptions move cap rate
- Does the mortgage affect cap rate? Cap rate with financing
- What does a 7.5% cap rate mean? Reading and reversing cap rate
- What is a good cap rate? Is 5%, 7% or 3% good?
- Common cap rate mistakes
- Cap rate formula in Excel and Google Sheets
- Free cap rate calculator vs a rental deal analyzer
- Step-by-step
- FAQ
What is the formula for a cap rate?
Cap rate (capitalization rate) = annual net operating income / purchase price x 100. It is the yearly return the property would produce if you bought it with cash, before income tax and before any loan.
Cap rate = NOI / price x 100
- NOI = rent after vacancy - operating costs (property tax, insurance, management, maintenance, CapEx reserve, HOA, utilities you pay).
- Not in NOI: mortgage principal and interest, income tax, depreciation, and one-off purchase costs such as closing costs or an upfront rehab.
- Price = purchase price, or current market value if you are measuring a property you already own.
What is the cap rate if a building sells for $1,000,000 with an NOI of $120,000? 120,000 / 1,000,000 = 0.12, a 12% cap rate. The whole calculation is one division; the work is in getting NOI right.
I'm not a landlord or investor; I build the arithmetic. Every rent, tax and expense figure below is an assumption to replace with the listing, a tax bill and an insurance quote.
Cap rate calculator for rental property
Enter the price, rent, taxes, insurance and expense percentages; the calculator builds NOI and returns the cap rate, alongside cash flow and cash-on-cash. Defaults match the moderate example below.
The financing boxes (down payment, rate, term) change cash flow and cash-on-cash but not the cap rate. Try it: change the down payment and watch the cap rate stay put. This is a screening aid, not investment advice.
How do you calculate cap rate? Worked example
Calculate cap rate in four steps: rent after vacancy, minus operating costs, times 12, divided by price. Here is a $200,000 house renting at $1,800 a month, with tax of $2,600 and insurance of $1,300 a year.
| Line | Working | Monthly |
|---|---|---|
| Scheduled rent | Input | $1,800.00 |
| Vacancy | 5% x $1,800 | -$90.00 |
| Rent after vacancy | $1,800 - $90 | $1,710.00 |
| Management | 8% x $1,800 | -$144.00 |
| Maintenance reserve | 5% x $1,800 | -$90.00 |
| CapEx reserve | 5% x $1,800 | -$90.00 |
| Property tax | $2,600 / 12 | -$216.67 |
| Insurance | $1,300 / 12 | -$108.33 |
| NOI | $1,710 - $649 | $1,061.00 |
Annual NOI is $1,061 x 12 = $12,732.00. Cap rate is $12,732.00 / $200,000 = 6.37%. The mortgage ($997.95 a month at 25% down and 7%) appears nowhere in that calculation.
Worked example: Moderate assumptions: $200,000 house, $1,800 rent, 5% vacancy, 8% management, 5% maintenance, 5% CapEx (all inputs are assumptions)
| Item | Value |
|---|---|
| Down payment % (input) | 25% |
| Closing costs % (input) | 3% |
| Repairs / rehab (input) | $0.00 |
| Interest rate % (input) | 7% |
| Loan term (years) (input) | 30 |
| Vacancy % (input) | 5% |
| Management % of rent (input) | 8% |
| Property tax a year (input) | $2,600.00 |
| Insurance a year (input) | $1,300.00 |
| Maintenance % of rent (input) | 5% |
| CapEx reserve % of rent (input) | 5% |
| HOA a month (input) | $0.00 |
| Other costs a month (input) | $0.00 |
| Purchase price (input) | $200,000.00 |
| Monthly rent (input) | $1,800.00 |
| Loan amount | $150,000.00 |
| Mortgage payment (P&I) a month | $997.95 |
| Cash invested | $56,000.00 |
| Rent after vacancy | $1,710.00 |
| Operating costs a month | $649.00 |
| Net operating income a year | $12,732.00 |
| Cap rate | 6.37% |
| Cash flow a month | $63.05 |
| Cash flow a year | $756.56 |
| Cash-on-cash return | 1.35% |
| Passes the 1% rule? | No |
| Rent as % of price | 0.9% |
| Debt service coverage ratio | 1.06 |
Computed with the same formulas as the free calculators on this site. Change any input in the calculator above to see your own numbers.
How vacancy, management and CapEx assumptions move cap rate
Cap rate is only as honest as the expenses in NOI. Run the same house, same price and same rent through three sets of assumptions and it spans more than three percentage points.
| Assumption set | Vacancy / mgmt / maint / CapEx | Annual NOI | Cap rate |
|---|---|---|---|
| Lean | 0% / 0% / 5% / 0% | $16,620.00 | 8.31% |
| Moderate | 5% / 8% / 5% / 5% | $12,732.00 | 6.37% |
| Conservative | 8% / 10% / 8% / 8% | $10,356.00 | 5.18% |
Worked example: Lean assumptions: same house, no vacancy, self-managed, no CapEx reserve, 5% maintenance (assumptions)
| Item | Value |
|---|---|
| Down payment % (input) | 25% |
| Closing costs % (input) | 3% |
| Repairs / rehab (input) | $0.00 |
| Interest rate % (input) | 7% |
| Loan term (years) (input) | 30 |
| Vacancy % (input) | 0% |
| Management % of rent (input) | 0% |
| Property tax a year (input) | $2,600.00 |
| Insurance a year (input) | $1,300.00 |
| Maintenance % of rent (input) | 5% |
| CapEx reserve % of rent (input) | 0% |
| HOA a month (input) | $0.00 |
| Other costs a month (input) | $0.00 |
| Purchase price (input) | $200,000.00 |
| Monthly rent (input) | $1,800.00 |
| Loan amount | $150,000.00 |
| Mortgage payment (P&I) a month | $997.95 |
| Cash invested | $56,000.00 |
| Rent after vacancy | $1,800.00 |
| Operating costs a month | $415.00 |
| Net operating income a year | $16,620.00 |
| Cap rate | 8.31% |
| Cash flow a month | $387.05 |
| Cash flow a year | $4,644.56 |
| Cash-on-cash return | 8.29% |
| Passes the 1% rule? | No |
| Rent as % of price | 0.9% |
| Debt service coverage ratio | 1.39 |
Computed with the same formulas as the free calculators on this site. Change any input in the calculator above to see your own numbers.
Worked example: Conservative assumptions: same house, 8% vacancy, 10% management, 8% maintenance, 8% CapEx (assumptions)
| Item | Value |
|---|---|
| Down payment % (input) | 25% |
| Closing costs % (input) | 3% |
| Repairs / rehab (input) | $0.00 |
| Interest rate % (input) | 7% |
| Loan term (years) (input) | 30 |
| Vacancy % (input) | 8% |
| Management % of rent (input) | 10% |
| Property tax a year (input) | $2,600.00 |
| Insurance a year (input) | $1,300.00 |
| Maintenance % of rent (input) | 8% |
| CapEx reserve % of rent (input) | 8% |
| HOA a month (input) | $0.00 |
| Other costs a month (input) | $0.00 |
| Purchase price (input) | $200,000.00 |
| Monthly rent (input) | $1,800.00 |
| Loan amount | $150,000.00 |
| Mortgage payment (P&I) a month | $997.95 |
| Cash invested | $56,000.00 |
| Rent after vacancy | $1,656.00 |
| Operating costs a month | $793.00 |
| Net operating income a year | $10,356.00 |
| Cap rate | 5.18% |
| Cash flow a month | $-134.95 |
| Cash flow a year | $-1,619.44 |
| Cash-on-cash return | -2.89% |
| Passes the 1% rule? | No |
| Rent as % of price | 0.9% |
| Debt service coverage ratio | 0.86 |
Computed with the same formulas as the free calculators on this site. Change any input in the calculator above to see your own numbers.
The lean column assumes a tenant who never leaves, an owner who works for free and a roof that never wears out. Those costs are real; they just arrive irregularly. When you compare a seller's advertised cap rate with your own, ask which expense lines are in it. Self-managing? Keep a management line anyway: it prices your time and it is the cost you will pay if you hand the property over.
Does the mortgage affect cap rate? Cap rate with financing
No. Cap rate describes the property, so it is identical whether you pay cash or borrow. Financing changes cash flow and cash-on-cash return instead.
| Down payment | Cap rate | Cash flow a year | Cash-on-cash |
|---|---|---|---|
| 20% | 6.37% | -$41.81 | -0.09% |
| 25% | 6.37% | $756.56 | 1.35% |
| 100% (cash) | 6.37% | $12,732.00 | 6.18% |
Here borrowing makes the return worse, because the 6.37% cap rate is below the loan constant of a 7%, 30-year mortgage (about 7.98% of the loan paid each year). A search for a "cap rate calculator with mortgage" is usually looking for this second number. The cash-on-cash return calculator guide covers it and the leverage test in full, so I won't repeat it here.
What does a 7.5% cap rate mean? Reading and reversing cap rate
A 7.5% cap rate means annual NOI equals 7.5% of the price: a $100,000 property producing $7,500 of NOI a year. At a flat NOI that is roughly 13.3 years of income to equal the price (100 / 7.5), before financing, tax, rent growth or resale.
Reverse cap rate: value from NOI
Rearrange the formula to get a price: value = NOI / cap rate. If you require a 7% cap rate on the moderate numbers, the most you would pay is 12,732 / 0.07 = $181,885.71. At 6% the same NOI supports $212,200. This is also how to calculate cap rate without a market value: use the price you are considering, or use a target cap rate to find the price.
Small cap-rate changes move value a lot. Going from 7% to 6% raises the implied value by $30,314.29 on the same income, which is why the expense assumptions above matter.
What is a good cap rate? Is 5%, 7% or 3% good?
There is no universal good cap rate, and I won't quote a market average I can't verify. Cap rates differ by property type, location, condition and interest rates, and a high one can simply reflect a riskier property. Judge a cap rate against your own benchmarks instead:
- Your cost of borrowing. If the cap rate is below the loan constant (about 7.98% at 7% for 30 years), leverage lowers your cash return, as the table above shows.
- Your alternatives. What the same cash earns elsewhere with less work and risk, plus a premium you choose.
- How it was built. A 7% on conservative expenses can be stronger than 8% on lean ones. The house above is 8.31% or 5.18% depending on the column.
So is a 5% cap rate good? Against a 7.98% loan constant it will not cash-flow well with a large loan; an all-cash buyer with lower alternatives may accept it. Is a 3% cap rate bad? It leaves little room for vacancy or repairs and means most of the return must come from appreciation you are assuming. Is 7% or 7.5% good? Only relative to your benchmarks. This is arithmetic, not financial advice.
What are the 7% and 50% rules?
Both are screens, not verdicts. The 50% rule assumes operating costs plus vacancy take half the rent: $900 a month here, leaving $10,800 of NOI and a 5.4% cap rate, close to the conservative column. The "7% rule" is used with different meanings; the rental property analysis spreadsheet guide applies each version to a full deal.
Common cap rate mistakes
Most wrong cap rates come from what is counted in NOI.
- Subtracting the mortgage. $756.56 of cash flow over $200,000 reads 0.38%, a figure that describes your loan, not the property.
- Using gross rent. $21,600 of scheduled rent over $200,000 is 10.8%. That is a gross yield, not a cap rate.
- Leaving out vacancy, management or CapEx. The lean column above adds nearly two points of cap rate that the property will not deliver over time.
- Mixing prices. Compare cap rates on the same basis: purchase price with purchase price, or current value with current value.
- Adding closing costs to NOI. They are part of what you pay, not a yearly operating cost. Count them in cash invested for cash-on-cash instead.
Cap rate formula in Excel and Google Sheets
Cap rate is =NOI/price, formatted as a percentage. The formulas below build NOI from the inputs so you can change one assumption and watch the cap rate move. Layout: B2 price, B3 monthly rent, B4 vacancy %, B5 management + maintenance + CapEx % combined, B6 property tax a year, B7 insurance a year.
Monthly NOI
=B3*(1-B4)-B3*B5-(B6+B7)/12B3 = rent, B4 = vacancy %, B5 = management + maintenance + CapEx %, B6 = tax a year, B7 = insurance a year.
Cap rate
=B8*12/B2B8 = monthly NOI cell, B2 = price. Format as a percentage.
Value from a target cap rate
=B8*12/B10B10 = the cap rate you require (e.g. 7%). Returns the most you would pay for that NOI.
Loan constant (compare with cap rate)
=PMT(B11/12,B12*12,-1)*12B11 = interest rate, B12 = loan years. If cap rate is below this, more debt lowers cash-on-cash.
To reproduce the three-column table, copy the inputs into three columns and change B4 and B5 in each. Google Sheets uses the same syntax as Excel.
Free cap rate calculator vs a rental deal analyzer
A two-box cap rate calculator (NOI and price) is fine if you already trust the NOI. A deal analyzer is better when you need to build NOI from rent and costs and see cash flow and cash-on-cash beside it, because that is where the assumptions hide.
What to put in a cap rate template: price, monthly rent, vacancy %, management %, maintenance %, CapEx %, property tax, insurance, HOA and owner-paid utilities as inputs; rent after vacancy, operating costs, monthly and annual NOI, cap rate and a reverse-cap-rate value as outputs; and financing inputs on a separate block so they cannot leak into NOI.
The rental property deal analyzer spreadsheet calculates real cash flow after taxes, insurance, vacancy, repairs and management, with cap rate, cash-on-cash and the 1% rule, colour-coded so a weak deal stands out, in Excel and Google Sheets. It is $14.99 one-time, or part of the $49 7-template bundle. Comparing a long-term let with a short-term one? The Airbnb vs long-term rental guide runs both on one property. For long-term deals, the cap rate calculator spreadsheet keeps every assumption visible so you can check the number.
Rental Property Deal Analyzer
The spreadsheet version of this guide for Excel & Google Sheets: type your numbers into the highlighted cells and the formulas do the rest. One-time $14.99, no subscription, instant download.
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Step-by-step: Cap Rate Calculator: Formula, Worked Examples and Excel
- Start with scheduled rent. Use rent supported by comparable listings, not the seller's figure. Example: $1,800 a month.
- Subtract vacancy. Rent x (1 - vacancy %). At 5%, $1,800 becomes $1,710.00.
- Subtract operating costs. Tax, insurance, management, maintenance, CapEx, HOA and owner-paid utilities. Leave the mortgage out. Example: $649 a month.
- Annualise NOI. Monthly NOI x 12. $1,061 x 12 = $12,732.00.
- Divide by price. $12,732.00 / $200,000 = 6.37%. Then rerun with conservative expenses to see the range.
Skip the setup: Rental Property Deal Analyzer
The spreadsheet version of this guide for Excel & Google Sheets: type your numbers into the highlighted cells and the formulas do the rest. One-time $14.99, no subscription, instant download.
See the Rental Property Deal Analyzer →Buy now — $14.99All 7 templates — $49Instant access by email after checkout via Payhip.
Frequently asked questions
How do you calculate your cap rate?
Divide annual net operating income by the purchase price and multiply by 100. NOI is rent after vacancy minus operating costs, without the mortgage. $12,732.00 of NOI on a $200,000 house is a 6.37% cap rate.
What is the cap rate if a building sells for $1,000,000 with an NOI of $120,000?
12%. Divide NOI by price: 120,000 / 1,000,000 = 0.12. Check that the $120,000 is true NOI, after vacancy, management and reserves and before debt service, or the 12% overstates the return.
What does a 7.5% cap rate mean?
The property's yearly NOI equals 7.5% of its price. A $100,000 property with a 7.5% cap rate produces $7,500 of NOI a year before any mortgage payment or income tax. It says nothing about financing, appreciation or your cash-on-cash return.
What is considered a good cap rate?
There is no single number. A cap rate is good relative to your borrowing cost, your alternatives and the risk of the property. Compare it with the loan constant (about 7.98% for a 7%, 30-year loan) and check the expenses behind it before comparing deals.
Is a 5% cap rate good?
It depends on how you buy. With a 7%, 30-year loan, whose constant is about 7.98%, a 5% cap rate property will usually not cash-flow well on a large loan. An all-cash buyer with lower-yielding alternatives, or one expecting strong rent growth, may still accept it.
Does cap rate include the mortgage payment?
No. Cap rate uses NOI, which is calculated before debt service, so it is the same whether you pay cash or borrow. The mortgage affects cash flow and cash-on-cash return; in the moderate example the cap rate stays 6.37% at 20%, 25% or 100% down.
How do I calculate cap rate in Excel?
Put annual NOI in one cell and the price in another, then divide: =B8*12/B2 if B8 holds monthly NOI. Format as a percentage. Build NOI with =B3*(1-B4)-B3*B5-(B6+B7)/12 from rent, vacancy, expense percentages, tax and insurance.
What is the difference between cap rate and cash-on-cash return?
Cap rate is NOI divided by price and ignores financing. Cash-on-cash is cash flow after the mortgage divided by the cash you invested. The moderate example has a 6.37% cap rate but a 1.35% cash-on-cash return at 25% down.
I'm not a contractor, landlord or accountant. I build the pricing maths, and every number on this page shows its working so you can check it instead of trusting it. Watch the breakdowns on YouTube →