Higher cap rate
More income per dollar of price. That can mean a better buy, or more risk: weaker location, older building, shorter leases or income the market expects to fall.
Cap rate calculator
Enter a property's net operating income and price to get its capitalization rate, and see the value a target cap rate would imply.
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Cap rate calculator
The starting figures come from the OCC's income-property example: a $9 million rental property with net operating income of $694,000. Replace them with your own.
- Cap rate
- 7.71%
- NOI ÷ price
- Value at 7.5%
- $9,253,333
- NOI ÷ target cap rate
Formula: Cap rate = net operating income ÷ price. Value = net operating income ÷ cap rate.
Starting figures are hypothetical examples, except where a section names its source. Results are screening estimates, not appraisals, loan approvals or investment advice.
How to calculate cap rate
A cap rate converts one year of net operating income into a value. Freddie Mac's appraisal guidance writes it as NOI ÷ cap rate = value, so the same three numbers can solve for any one of them.
Start with gross rent
In the OCC example, scheduled rent is $1,000,000 a year. Subtract 5% for vacancy and collection loss to get effective gross income of $950,000.
Subtract operating expenses
Taxes, insurance, repairs, management and replacement reserves total $256,000. That leaves net operating income of $694,000. Loan payments are not operating expenses.
Divide by price
$694,000 ÷ $9,000,000 = 0.0771, a cap rate of 7.71%.
Or solve for value
If similar sales trade at a 7.5% cap rate, $694,000 ÷ 0.075 = $9,253,333. A lower cap rate on the same income means a higher value.
Use the NOI calculator if you need to build net operating income from rent and expenses first.
How to read a cap rate
There is no single good cap rate. It reflects what buyers will pay for a stream of income given its risk and expected growth, so compare it only with similar properties.
Lower cap rate
Less income per dollar of price. Buyers accept it when they see stable income or expect rents and value to grow. Freddie Mac notes that expected income change is built into the rate.
Check whose NOI it is
A seller's NOI may leave out reserves or management. Lenders and appraisers often deduct them. Rebuild NOI on the same basis before comparing cap rates.
Cap rate ignores financing
It measures the property, not your loan. To see the return on your own cash after the mortgage, use the cash-on-cash return calculator.
Frequently asked questions
QUICK ANSWERS
It depends on the property type, location, lease terms and interest rates. Compare a property with recent sales of similar properties in the same market rather than with a national rule of thumb.
No. Net operating income is measured before debt service, so the cap rate is the same whether you pay cash or borrow. Financing shows up in cash-on-cash return and DSCR.
No. Cap rate is one year of income divided by price. It leaves out financing, future rent changes, capital spending and the sale price when you exit.
Use the purchase price to judge a deal you are buying, and a current market value to track a property you own. Say which one you used when you compare.
How we reviewed this
Sources reviewed October 16, 2026. The worked example uses the OCC handbook's published figures. Interpretation guidance is Zero Flux's, based on these sources.