Rental Property Cap Rate Calculator
Calculate annual net operating income from rent, vacancy, and operating expenses, then divide by purchase price to see the cap rate.
How the cap rate is calculated
A capitalization rate, or cap rate, is annual net operating income divided by a property's purchase price. It expresses the relationship between modeled property income and price as a percentage. It is a comparison ratio, not a complete return measure or forecast.
The calculation first subtracts the vacancy allowance from gross annual rent. It then subtracts annual operating expenses to find net operating income, or NOI. Dividing NOI by a positive purchase price gives the cap rate. NOI and the cap rate may be negative when modeled operating expenses exceed effective gross income.
For example, 50,000 USD of annual rent with an 8% vacancy rate leaves 46,000 USD of effective gross income. After 15,000 USD in operating expenses, NOI is 31,000 USD. At a purchase price of 500,000 USD, the cap rate is 6.2%.
Use the result as a current ratio of modeled annual NOI to purchase price. Compare properties only when rent periods, expense definitions, vacancy assumptions, and currency units are consistent.
Step by step
- Enter the purchase price, gross rent for one year, vacancy rate, and operating expenses for one year.
- Review vacancy loss, effective gross income, NOI, monthly gross rent, and the cap rate.
- Change one assumption at a time or enter another property using the same definitions and currency.
Worked example
Example inputs: purchase price 500,000 USD, gross annual rent 50,000 USD, vacancy rate 8%, and annual operating expenses 15,000 USD.
The vacancy allowance is 4,000 USD, effective gross income is 46,000 USD, and NOI is 31,000 USD. Dividing NOI by the purchase price gives a cap rate of 6.2%. Monthly gross rent is 4,166.67 USD.
When to use this calculation
Use this calculation when you have a purchase price, annual gross rent, a vacancy assumption, and annual operating expenses, and want their NOI to price ratio.
For a broader property analysis, pair it with a cash flow calculation that accounts for financing and cash invested. Keep annual periods, expense categories, and currency consistent.
Common input errors
Do not subtract vacancy twice. Enter annual operating expenses separately from the vacancy percentage, and do not include mortgage payments or capital expenditures in this cap rate calculation.
Check that rent and expenses cover the same twelve month period and use the same currency as the purchase price. A cap rate alone does not show financing cash flow or total return.
Formula
Vacancy loss = Gross annual rent × Vacancy rate ÷ 100
Effective gross income = Gross annual rent − Vacancy loss
NOI = Effective gross income − Annual operating expenses
Cap rate = NOI ÷ Purchase price × 100
All rent and expense amounts are annual except the separately displayed monthly gross rent. Vacancy rate must be from 0% to 100%. A positive purchase price is required to calculate a cap rate.
Model limits
This calculation uses the annual rent and costs you enter. Operating expenses should exclude vacancy loss, mortgage principal and interest, capital expenditures, and income tax. The result does not model appreciation, rent changes, sale costs, or an investment forecast. A zero purchase price leaves the cap rate unavailable. Values use the displayed currency without conversion.
Key terms
- Capitalization rate
- Net operating income divided by purchase price, expressed as a percentage. It summarizes the modeled annual property income relative to its price.
- Net operating income
- Annual gross rent less the vacancy allowance and annual operating expenses, before mortgage payments and income tax.
- Vacancy and operating expenses
- The entered vacancy percentage reduces gross rent. Annual operating expenses are subtracted afterward and should not include vacancy costs already represented by that percentage.
Related property calculations
Cap rate compares annual net operating income with a property's purchase price. Cash on Cash Return uses annual property cash flow and cash invested, so its inputs include financing and cash costs that this calculation leaves out.
Use the Gross Rent Multiplier Calculator to compare price with gross rent before vacancy and expenses. Use REIT vs Physical Property to compare a simplified listed fund scenario with direct property ownership.
FAQ
What does a cap rate tell me?
It shows modeled annual NOI as a percentage of purchase price. It can help compare properties with similar income and expense definitions, but it does not capture financing, taxes, future changes, or every ownership cost.
Does the cap rate include mortgage payments?
No. Mortgage principal and interest are not part of NOI in this tool. The cap rate is calculated before debt service, so it does not show cash flow on the amount you invest.
How does the vacancy rate change the result?
The vacancy rate is applied to gross annual rent to calculate a vacancy allowance. That amount is subtracted before operating expenses. At 100% vacancy, effective gross income is zero.
What should count as an operating expense?
Enter annual operating costs that are not already represented by vacancy loss. Do not include mortgage principal or interest, capital expenditures, or income tax in this field. Use the same cost definitions when comparing properties.
Does a higher cap rate mean a better investment?
Not by itself. A higher ratio can result from higher NOI or a lower purchase price, but it says nothing by itself about property condition, risk, financing, future income, or your goals. The tool does not rank properties.
Related tools
Cash on Cash Return includes financing and invested cash. Gross Rent Multiplier compares purchase price with gross rent before vacancy and expenses. REIT vs Physical Property models a separate comparison between listed funds and direct property scenarios.