What the cap rate measures
The capitalization rate, or cap rate, is the yearly net operating income of a rental property divided by its price or value. It tells you what share of the price the property earns each year after its running costs, as if you bought it for cash. Because the loan is left out, it lets you compare properties with each other no matter how they are financed.
The example in the calculator is a $300,000 property renting for $2,400 a month. After 5% vacancy, property tax, insurance, maintenance and 8% management, the NOI is $17,671 a year, so the cap rate is 5.89%.
What counts as an operating expense
Operating expenses are the costs of running the property: property tax, insurance, repairs and maintenance, property management, HOA fees and any utilities the owner pays. In this calculator, NOI leaves out loan payments, depreciation and your income tax. That keeps the cap rate a measure of the property, not of your loan or your tax situation. The expense ratio under the result shows the operating expenses as a share of the income you actually collect.
Large one-time replacements, such as a roof or a furnace, do not show up every year but still have to be paid. If you want the NOI to reflect them, spread their expected cost over the years and add it to repairs and maintenance.
Cash-on-cash return and the effect of a loan
If you borrow, the cap rate is not what your own money earns. The cash-on-cash return is the yearly cash flow after the loan payments, divided by the cash you put in: the down payment plus closing costs and upfront repairs.
In the example, buying with 25% down at 6.5% for 30 years leaves $605 of cash flow a year on $84,000 invested, a cash-on-cash return of 0.72%. Bought for cash, the same property returns 5.72% on $309,000. A loan raises the cash-on-cash return only when a year of loan payments is a smaller share of the loan than the all-cash return. Here the payments come to 7.58% of the loan a year, more than the 5.72% all-cash return, so borrowing lowers the return.
Gross rent multiplier
The gross rent multiplier (GRM) is the price divided by one year of gross rent. It needs only two numbers, so it is handy for a first look at listings. It ignores vacancy and every expense, though, so use the cap rate before you decide. The example property has a GRM of 10.42.
The price for a target cap rate
Turn the formula around and you get the price that gives a cap rate you want: NOI ÷ target cap rate. Enter a target under Other income and costs to see it. This is a way to check an asking price against your own requirement, not a statement of what the property is worth.
What the calculator leaves out
- Appreciation and loan paydown: the property may gain or lose value, and part of each loan payment builds equity. Neither is cash flow, so neither is in the cap rate or the cash-on-cash return.
- Income tax and depreciation: all figures are before tax.
- Rent growth: the numbers are for one year as you enter them.
For a return that includes a sale price and the years held, use the ROI calculator. The mortgage calculator shows the full loan schedule, and the NPV and IRR calculator handles cash flows that change from year to year.
How to use the cap rate calculator
- 1Enter the price or current value of the rental property, the monthly rent of all units and the vacancy you expect.
- 2Add the yearly property tax, insurance and maintenance and the management fee. Choose a loan or all cash, and enter the down payment, rate, term and closing costs.
- 3Read the cap rate, the NOI, the cash flow and the cash-on-cash return, check the income and expense table, and copy the result or a link.
Frequently asked questions
How do you calculate the cap rate?
Divide the net operating income (NOI) for one year by the property's price or current value, and multiply by 100. A property that costs $300,000 and brings in $18,000 of NOI a year has a cap rate of 6%. The loan does not enter the formula, so the cap rate compares properties as if they were bought for cash.
What goes into net operating income?
Start with the rent and other income for a full year, take off the expected vacancy and unpaid rent, then subtract the operating expenses: property tax, insurance, repairs and maintenance, management, HOA fees and utilities you pay. Loan payments are not operating expenses, so NOI is the same whether you borrow or not.
What is the difference between cap rate and cash-on-cash return?
The cap rate measures the property: NOI divided by the price. Cash-on-cash return measures your deal: the cash flow left after loan payments, divided by the cash you actually put in, which is the down payment plus closing costs. A loan changes the cash-on-cash return but not the cap rate.
What is the gross rent multiplier?
The price divided by the gross rent for one year. A $300,000 property that rents for $2,500 a month has a GRM of 10. It is a quick way to compare similar properties, but it ignores vacancy and expenses, so two properties with the same GRM can have very different NOI.
Why can the cash flow be negative when the cap rate looks fine?
Because the loan payment is not part of NOI. If the loan payments for a year are larger than the NOI, the property costs you money each month even though its cap rate is positive. The debt service coverage ratio under the result shows this: below 1.00, the NOI does not cover the payments.
Is my data sent anywhere?
No. Every calculation runs in your browser. The share link carries your numbers in the link itself.