What the cap rate tells you
The capitalization rate expresses a property's yearly net income as a percentage of its price, as if you bought it in cash. It answers a simple question: for every dollar of price, how many cents of net income does the building produce? A property priced at $350,000 with $24,000 of net operating income has a cap rate of about 6.9%. Because it strips out financing, the cap rate lets you compare very different deals — a small duplex against a retail unit — on the same footing. It is the market's shorthand for how expensive income is in a given area and asset class.
Net operating income is the engine
Cap rate is only as good as the net operating income (NOI) behind it. NOI is annual gross rent minus operating expenses — taxes, insurance, management, maintenance, utilities you cover and a vacancy allowance — but crucially not your mortgage. Sellers often quote an optimistic NOI by understating expenses or ignoring vacancy, which inflates the cap rate. Build your own NOI from realistic numbers before trusting any advertised rate. This calculator takes your gross rent and total operating expenses and returns both the NOI and the resulting cap rate so you can see exactly what drives the figure.
What counts as a good cap rate
There is no universal 'good' cap rate — it depends on location, property type and risk. Prime property in a strong, stable city may trade at 4–5% because buyers accept lower income for safety and appreciation. Higher-risk or higher-vacancy markets might demand 8–10% to compensate. A very high cap rate is not automatically a bargain; it often signals a rough neighbourhood, deferred maintenance or unreliable tenants. Read the cap rate alongside local comparables and the quality of the income, not in isolation, and remember it says nothing about your actual cash return once a loan is involved.
Where cap rate stops being useful
Cap rate ignores financing, so two investors buying the same building at the same cap rate can earn wildly different cash returns depending on their mortgage. For your own return after a loan, use cash-on-cash return; for lender appetite, use DSCR. Cap rate also assumes stable income, so it fits stabilised rentals better than a heavy renovation or flip. Treat it as a fast first screen, then dig deeper with the other tools here. These tools use standard, published real-estate formulas and the figures you enter. They are estimates for planning and comparison, not financial, investment or tax advice — run your own numbers and speak to a qualified professional before you buy.
Frequently asked questions
How is cap rate calculated?
Cap rate = net operating income ÷ property price × 100, where NOI is annual gross rent minus annual operating expenses (excluding the mortgage). This calculator does all three steps for you.
What is a good cap rate?
It depends on market and risk. Prime, low-risk property often sits at 4–5%; higher-risk or higher-yield markets can run 8–10%. A very high cap rate usually reflects higher risk, not a free lunch.
Does cap rate include the mortgage?
No. Cap rate deliberately excludes financing so properties can be compared as if bought in cash. For your return after a loan, use the cash-on-cash return calculator instead.
Cap rate vs cash-on-cash return — what's the difference?
Cap rate measures the property's unleveraged return (income ÷ price). Cash-on-cash measures your leveraged return (cash flow after mortgage ÷ cash you actually invested).