Cap Rate Calculator
Enter a property's value, gross annual rental income, and operating expenses to calculate the capitalization rate, net operating income, and gross rent multiplier. These are the three core metrics used by professional investors to evaluate and compare rental properties.
Results are estimates for informational purposes only. Not financial advice. Full disclaimer.
What is Cap Rate?
The capitalization rate (cap rate) is the ratio of a property's net operating income (NOI) to its current market value, expressed as a percentage. It answers a simple question: if you bought this property in cash with no mortgage, what annual return would you earn from the rental income alone? Cap rate is the most widely used metric in commercial real estate valuation. Unlike rental yield, which can be calculated on gross income, cap rate always uses NOI — the income remaining after all operating expenses are deducted but before mortgage payments and income taxes. This makes it a true measure of the property's operating performance, independent of financing. Net Operating Income (NOI) is calculated by subtracting operating expenses from gross rental income. Operating expenses include property taxes, insurance, maintenance, property management fees, utilities paid by the owner, and a vacancy/credit loss allowance. NOI does not include mortgage payments, capital expenditures, or depreciation — these are financing and accounting items, not operating costs. The Gross Rent Multiplier (GRM) is a simpler metric that divides the property price by the gross annual rent. A GRM of 12.5 means the property costs 12.5 times its annual gross rent. Lower GRMs indicate better value relative to income. GRM is useful for quick comparisons but less precise than cap rate because it ignores expenses entirely. Cap rates vary significantly by property type, location, and market conditions. As of 2024-2025, typical ranges are: Class A apartments in major metros (4–5%), Class B/C apartments (5–7%), single-family rentals (5–8%), small multifamily (6–9%), and commercial properties (6–10%). Lower cap rates generally indicate lower risk and higher-quality assets in stronger markets. Higher cap rates suggest higher risk, weaker markets, or value-add opportunities.
How to Calculate
- Enter the property's current market value or purchase price
- Enter the gross annual rental income (monthly rent × 12, at full occupancy)
- Enter total annual operating expenses (taxes, insurance, maintenance, management, vacancy reserve)
- Review the NOI, cap rate, and GRM
- Compare the cap rate against local market averages and your minimum return threshold
Formula
Net Operating Income (NOI) = Gross Annual Rental Income − Annual Operating Expenses Capitalization Rate = NOI ÷ Property Value × 100 Gross Rent Multiplier (GRM) = Property Value ÷ Gross Annual Rental Income Operating expenses should include: property taxes, insurance, repairs and maintenance, property management fees (if applicable), utilities paid by owner, landscaping, pest control, and a vacancy/credit loss allowance (typically 5–8% of gross rent). Do NOT include mortgage payments, capital improvements, or depreciation.
Example Calculation
For a property valued at $300,000 with $24,000 gross annual rental income and $8,000 in operating expenses: NOI = $24,000 − $8,000 = $16,000 Cap Rate = $16,000 ÷ $300,000 × 100 = 5.33% GRM = $300,000 ÷ $24,000 = 12.5 This 5.33% cap rate is typical for a decent residential investment property in a mid-tier market. The GRM of 12.5 means the purchase price equals 12.5 years of gross rent — also within normal ranges for residential rentals.
Frequently Asked Questions
What is a good cap rate for rental property?
A 'good' cap rate depends on your market and risk tolerance. In major US metros, 4–6% is typical for quality residential properties. In secondary markets, 6–9% is common. Generally, higher cap rates mean higher risk and higher potential returns, while lower cap rates indicate lower risk in stronger markets. Most residential investors target 5–8%.
What is the difference between cap rate and rental yield?
Cap rate always uses Net Operating Income (after operating expenses), while gross rental yield uses total rental income before expenses. Net rental yield and cap rate are conceptually similar, but cap rate is the standard in professional real estate — it specifically excludes mortgage payments, capital expenditures, and depreciation from the expense calculation.
Why don't cap rates include mortgage payments?
Cap rate measures the property's intrinsic operating performance, not your financing structure. Two investors buying the same property — one with cash, one with a mortgage — would see the same cap rate but different cash-on-cash returns. This separation allows apples-to-apples comparison between properties regardless of how they are financed.
What does a low GRM mean?
A lower GRM means the property is cheaper relative to its rental income — potentially a better value. A GRM of 8 means the property costs 8 years of gross rent, while a GRM of 15 means 15 years. However, GRM ignores expenses entirely, so a property with a low GRM but very high expenses might still be a poor investment. Always check cap rate alongside GRM.
How do cap rates change with interest rates?
Cap rates generally rise when interest rates rise and fall when rates fall, though the relationship is not one-to-one. Higher interest rates increase financing costs, which reduces buyer demand and pushes property values down (or prevents them from rising), which raises cap rates. Between 2022 and 2024, rising interest rates pushed average cap rates up by 50–150 basis points across most US markets.
What expenses should I include in operating expenses?
Include: property taxes, property insurance, repairs and maintenance (budget 1% of property value/year), property management fees (8–10% of rent if using a manager), vacancy allowance (5–8% of rent), utilities you pay (water, sewer, trash, common area electric), landscaping, snow removal, and pest control. Do NOT include: mortgage payments, capital expenditures (roof replacement, HVAC), depreciation, or income taxes.