Calculate the capitalization rate for any income property. Enter net operating income and property value to determine cap rate, or work backwards to find the right purchase price for your target return.
The Cap Rate Calculator helps investors measure the return on a property independent of financing.
With $30K NOI and $400K property value, cap rate is 7.5%.
The cap rate is your first and most important filter for evaluating income-producing properties. A 7% cap rate means the property generates net income equal to 7% of its purchase price annually — similar to a dividend yield on a stock. However, unlike a stock dividend, the cap rate does not account for your financing costs, and it ignores any potential appreciation or depreciation of the property value over time. When comparing properties, look at the spread between the cap rate and the risk-free rate (10-year Treasury yield). A spread of 300-500 basis points is historically normal and indicates fairly priced real estate. A spread below 250 basis points suggests the property may be overpriced relative to bonds. A spread above 600 basis points may signal a value opportunity or hidden risks that warrant deeper investigation. Cap rates vary significantly by property type. Multifamily properties typically trade at the lowest cap rates (4-6%) due to stable demand and institutional investor preference. Industrial properties command moderate cap rates (5-7%). Retail and office properties generally have higher cap rates (6-9%) reflecting higher vacancy risk and longer lease-up periods. Within each category, location quality, tenant credit, and lease structure create significant variation. The most important limitation of cap rate analysis is that it is a static measure — it captures only the first year's return and assumes no change in income or value. Sophisticated investors combine cap rate analysis with discounted cash flow modeling, IRR calculations, and sensitivity analysis to account for rent growth, expense inflation, capital expenditures, and exit cap rates. Use this cap rate calculator as your starting point, then layer on additional analysis before making investment decisions.
The capitalization rate, commonly called cap rate, is the most widely used metric in commercial real estate investing. It provides a simple, standardized way to evaluate the return on an income-producing property without the distortions of financing structure. A cap rate answers one fundamental question: if you bought a property for cash, what percentage return would your net operating income generate in the first year? Developed from the income capitalization approach to property valuation, the cap rate has been a cornerstone of real estate analysis for decades. Appraisers use it for valuation, investors use it for comparison, and lenders use it for underwriting. Understanding cap rates — what drives them, how they vary by property type and location, and how they interact with interest rates — is essential knowledge for anyone investing in commercial or residential rental real estate.
Use the Cap Rate Calculator whenever you are evaluating an income-producing property for purchase, comparing multiple investment opportunities, or reviewing your existing portfolio. It is most valuable during initial property screening, before making an offer, during quarterly portfolio reviews, and when assessing whether to sell a property based on current market cap rates. Also use it when researching new markets to understand the going cap rate range before you start looking at specific properties.