Cap Rate Calculator
Calculate capitalization rate, property value, or NOI for real estate investments. Compare investment opportunities and analyze rental property returns.
Total rent collected per year
Taxes, insurance, maintenance, etc.
Cap Rate
7.20%
ModerateNet Operating Income
$36,000
$3,000/month
Investment Breakdown
$3,000/month
Cap Rate
7.20%
Annual NOI
$36,000
Price/Income
13.9x
Cap Rate Interpretation:
- 3-5%: Prime locations, lower risk
- 5-7%: Average/stable markets
- 8%+: Higher risk/return potential
Balanced Investment
This cap rate suggests a balanced risk/return profile typical of stable rental markets.
Cap Rate by Property Type
Single Family
4-8%
Residential rentals
Multifamily
5-9%
Apartments, duplexes
Retail
5-10%
Shopping centers
Industrial
6-10%
Warehouse, logistics
Cap rates vary significantly by market conditions and location
Cap Rate Formulas
Cap Rate
NOI / Property Value × 100
Measures annual return rate based on net operating income.
Property Value
NOI / (Cap Rate / 100)
Estimate value based on income and target return rate.
Net Operating Income
Gross Rent - Operating Expenses
Income before debt service and income taxes.
Frequently Asked Questions
Cap Rate Fundamentals: NOI, Property Value, and Risk Assessment
The capitalization rate is calculated as Net Operating Income (NOI) / Current Market Value x 100. NOI equals gross rental income minus operating expenses (property taxes, insurance, management fees, maintenance, and vacancy allowance). Mortgage payments, depreciation, and income taxes are excluded from NOI because they vary by investor rather than by property. A property generating $48,000 in annual rent with $12,000 in operating expenses has an NOI of $36,000. At a market value of $500,000, the cap rate is 7.2%.
Cap rates serve as a risk indicator: lower cap rates indicate lower perceived risk (and lower returns), while higher cap rates signal higher risk (and potentially higher returns). The relationship between cap rates and interest rates is directional but not proportional. When the 10-year Treasury yield rises, cap rates tend to follow with a lag. In 2024-2025, average commercial cap rates ranged from 5.5% to 8.5% depending on property type and location, up from the 4-6% range during the near-zero-rate environment of 2020-2021.
| Cap Rate Range | Risk Profile | Typical Markets |
|---|---|---|
| 3-5% | Core/low risk | NYC, SF, LA, Boston prime |
| 5-7% | Core-plus/moderate | Major metros, suburban |
| 7-9% | Value-add/higher return | Secondary cities, repositioning |
| 9-12%+ | Opportunistic/high risk | Tertiary markets, distressed |
Cap Rate vs. Cash-on-Cash Return vs. IRR
Cap rate measures property-level return ignoring financing. Cash-on-cash return measures the investor's actual yield: annual pre-tax cash flow divided by total cash invested (down payment + closing costs). A property with a 7% cap rate purchased with 25% down and a 6.5% mortgage may produce a cash-on-cash return of 9-11% due to positive leverage (the cap rate exceeds the mortgage rate).
When the mortgage interest rate exceeds the cap rate, negative leverage occurs -- the debt costs more than the property earns unlevered. A 5% cap rate property financed at 7% produces lower returns with debt than without it. In 2024-2026, with mortgage rates in the 6.5-7.5% range, many sub-6% cap rate properties exhibit negative leverage, making all-cash purchases or larger down payments more attractive.
The Internal Rate of Return (IRR) accounts for all cash flows over the hold period, including appreciation, rent growth, and sale proceeds. A property purchased at a 6% cap rate that appreciates 3% annually and is sold in year 5 may deliver an IRR of 12-15%. Cap rate is a snapshot; IRR is a movie. Sophisticated investors use all three metrics: cap rate for initial screening, cash-on-cash for cash flow analysis, and IRR for total return projection.
Market Cap Rate Trends and Compression/Expansion Cycles
Cap rate compression occurs when property values rise faster than rents, pushing cap rates lower. This happened dramatically from 2010-2022 as low interest rates and institutional capital flooded real estate markets. Average multifamily cap rates compressed from 7.5% in 2010 to 4.5% in 2022. Cap rate expansion -- the reverse -- began in 2022-2023 as the Federal Reserve raised rates, with multifamily cap rates expanding to the 5.5-6.5% range by 2025.
Cap rates vary significantly by property type and location. As of early 2026, average cap rates by sector: multifamily 5.5-6.5%, industrial/logistics 5.0-6.5%, office 7.0-9.0% (elevated due to remote work impact), retail 6.0-8.0%, and self-storage 5.5-7.0%. Office properties have seen the most significant cap rate expansion, with CBD office cap rates rising 200-300 basis points since 2022.
When evaluating a property, compare its cap rate to the market cap rate for similar properties in the same submarket. A single-family rental at a 6% cap rate in a market where comparable properties trade at 5% may be undervalued. Conversely, an 8% cap rate where the market averages 8.5% suggests the property is fully priced. The spread between cap rate and risk-free rate (10-year Treasury, approximately 4.2% in early 2026) indicates the risk premium investors demand, typically 200-400 basis points for commercial real estate.
Related Calculators
Official References
Learn more about real estate investment analysis:
- Understanding Capitalization Rate
Comprehensive guide to cap rate calculations
- IRS: Rental Income and Expenses
Tax implications for rental property owners
This calculator provides estimates. Actual returns depend on many factors including financing, taxes, appreciation, and property management.