Cap Rate Calculator
Find the capitalization rate of a commercial property from its rental income, vacancy allowance, and operating expenses — or solve backwards for the value a target cap rate implies. The income statement walk below shows exactly how net operating income is built.
Income statement walk
Every figure above traces back to this reconciliation. The rows down to net operating income are what a cap rate is built from; the rows below the NOI line depend on how the purchase is financed and are excluded from NOI by definition.
| Line item | Amount | % of gross income |
|---|
How the cap rate calculator works
A capitalization rate expresses a property's annual income as a percentage of its price. It is the return the building itself produces in a single year, before any financing is layered on top. This calculator builds that number from the bottom up rather than asking you to supply it:
where NOI = Gross rental income × (1 − vacancy rate) − operating expenses
The walk starts with gross annual rental income — what the property would collect if every unit were leased for all twelve months. Real buildings never do that, so a vacancy and credit-loss allowance is subtracted to give effective gross income. Operating expenses come off next, and what remains is net operating income. Divide NOI by the price and you have the cap rate. Switch the calculator to solve for value and it runs the same arithmetic backwards: value = NOI ÷ (cap rate ÷ 100), which is how appraisers and buyers convert an income stream into a price.
What NOI leaves out, and why
NOI is the most misread line in commercial real estate, almost always for the same reason: it excludes the mortgage. Debt service — principal and interest both — is not an operating expense and never enters the NOI calculation. Neither does depreciation, income tax, capital expenditure such as a roof replacement, nor amortization of loan points. NOI describes the property; those items describe the owner.
That exclusion is deliberate. Two buyers can look at the same building with completely different loans, or with no loan at all, and still agree on its NOI. Because the number is financing-neutral, it can be compared across properties and across buyers, which is exactly what makes a cap rate a usable benchmark. The moment you subtract a mortgage payment you are no longer measuring the asset — you are measuring one particular purchase of it.
Operating expenses that do belong above the NOI line include property taxes, insurance, any utilities the owner pays, property management, repairs and routine maintenance, landscaping, trash removal, and replacement reserves if your underwriting includes them.
Reading a cap rate
A cap rate is a price signal as much as a return. A low cap rate means buyers are paying a lot for each dollar of income, which usually reflects a stable tenant base, a strong location, or an expectation that rents will rise. A high cap rate means the market is discounting the income stream because of vacancy risk, deferred maintenance, a thin tenant pool, or a weaker submarket. The two readings describe different risk profiles at different prices rather than better and worse deals.
Cap rates also move with interest rates and with local conditions, so a figure that looked ordinary in one year can look aggressive two years later, and the same building can carry a different cap rate in two neighborhoods a mile apart.
Cap rate, cash-on-cash, DSCR, and GRM
The four figures this calculator reports answer four separate questions.
- Cap rate — what the property yields at its price, ignoring how it is financed.
- Cash-on-cash return — what the cash you actually invested yields after the loan payment. It moves the instant the loan terms change, even though the building has not.
- DSCR — NOI divided by annual debt service. It is a cushion measurement: 1.00 means the income exactly covers the payment with nothing left over, and commercial debt service coverage is normally underwritten above that.
- GRM — price divided by gross rent, a screening ratio that ignores expenses entirely. It is fast, not precise.
What moves a cap rate
Because a cap rate is a ratio, only two things can move it: NOI or price.
- Vacancy assumption — a cap rate quoted on full occupancy is quoted on a number the building has probably never produced. Raising vacancy from 5% to 8% cuts NOI and the cap rate with it.
- Expense treatment — pro formas sometimes omit management fees or replacement reserves. Adding them back lowers NOI.
- Trailing versus projected income — a cap rate on last year's actual collections and one on next year's projected rents are not the same measurement.
- Price — at a fixed NOI, every dollar of price reduction raises the cap rate, which is why a listing cap rate and a closing cap rate often differ.
Run the income statement table alongside the results. If the walk from gross income down to NOI does not reconcile against the property's actual operating statements, the cap rate sitting on top of it will not mean much either.
Frequently asked questions
Does NOI include the mortgage payment?
No. Net operating income is calculated before debt service. Principal and interest are both excluded, and so are depreciation, income taxes, capital expenditures, and loan amortization. NOI measures what the property produces, not what a particular owner's financing costs. Once you subtract the mortgage you are looking at cash flow before tax, which this calculator reports on a separate line.
What is a good cap rate?
There is no universal answer, because a cap rate is a price signal rather than a grade. Lower cap rates generally reflect properties that buyers view as lower risk or expect to grow, and higher cap rates reflect income streams the market is discounting for vacancy, condition, or location risk. The useful comparison is against recent sales of similar properties in the same submarket, not against a national average.
How is cap rate different from cash-on-cash return?
Cap rate divides NOI by the full property value and ignores financing entirely, so it describes the asset. Cash-on-cash return divides annual cash flow after debt service by the cash you actually invested, so it describes your position in the deal. Change the loan rate, the amortization, or the down payment and the cash-on-cash return moves while the cap rate does not.
Can I use a cap rate to value a property?
Yes, and that is what the solve-for-value mode does: value = NOI / (cap rate / 100). This is the income approach to valuation, and it is only as reliable as its two inputs. An NOI drawn from actual operating statements and a cap rate drawn from comparable sales in the same market give a defensible value; a pro forma NOI and a guessed cap rate do not.
Why does my cap rate differ from the one in the listing?
Listing cap rates are frequently calculated on pro forma income, which may assume full occupancy, higher rents than the property currently collects, or an expense list that leaves out management fees and replacement reserves. Recalculating on trailing actual figures and a realistic vacancy allowance usually produces a lower NOI and therefore a lower cap rate.
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This calculator is for educational and informational purposes only and does not constitute financial, legal, tax, or lending advice. Estimates are based on the values you enter and standard financial formulas. Confirm all figures with a qualified professional before making decisions.