Cap Rate Calculator

Cap rate = net operating income ÷ property value × 100; price to income multiple = 100 ÷ cap rate; value at target cap rate = net operating income ÷ (target cap rate ÷ 100); value gap = (value at target cap rate − property value) ÷ property value × 100

Net operating income

A year of rent actually collected, minus vacancy, minus the operating expenses of the building — taxes, insurance, management, maintenance, utilities the owner carries. Mortgage payments do not come out of it, which is what makes a cap rate comparable between a buyer paying cash and one borrowing. Entering gross rent here is the single most common mistake with this figure, and the page cannot detect it.

Property value

The price being asked, or the value you are testing. It is the denominator, so it sets what the income is being compared against — the same building at two prices has two cap rates and only one of them is the market's opinion.

Target cap rate

The return you would need in order to buy. It turns the calculation around: instead of asking what a price yields, it asks what price your required yield would justify, which is the more useful direction at the moment you are deciding what to offer.

Cap rate

Net operating income as a percentage of value, printed to two decimals. It is a one-year, cash-free, debt-free snapshot: no discounting, no rent growth, no resale. That is what makes it comparable across buildings — and what makes it silent about everything after year one.

Price to income multiple

The reciprocal of the cap rate, or value divided by income: how many years of the current net income the price represents. The two move in opposite directions, and the rate of 10 percent is the single point where they happen to be equal, which is a coincidence rather than a rule.

Value at target cap rate

What the same net income is worth if a buyer insists on your target return. It is the price the income justifies rather than the price being asked, and the distance between the two is the negotiation.

Value gap

How far the asking value sits above or below that justified value, as a percentage. A negative gap means the asking price is below what your target return justifies, so it clears your bar; a positive one means you are being asked to accept less than you wanted.

Use it to compare rental properties of different prices on one scale, or to test whether a particular asking price is defensible against the return you need. It is a first-pass filter rather than a valuation: it takes a year of income as given and asks what that year is worth, so it belongs early, before the multi-year models that try to forecast rent growth, vacancy and a sale. Two warnings that the arithmetic cannot give you. The numerator must be net of operating expenses — putting gross rent in produces a number that is too high and looks entirely plausible, and the page will not flag it. And a higher cap rate is not the same as a better deal: it usually means the market expects less from that property, whether because of its condition, its location or its tenants, and the whole point of the number is that it carries that expectation inside it.

1. The default: 60,000 of net income on a 1,000,000 property

   1. Cap rate: 60,000 ÷ 1,000,000 = 6 percent
   2. Price to income multiple: 100 ÷ 6 = 16.67
   3. Value at an 8 percent target: 60,000 ÷ 0.08 = 750,000
   4. Value gap: (750,000 − 1,000,000) ÷ 1,000,000 = −25 percent

   Read the last two lines together, because that is the decision. The property yields 6 percent at the asking price; a buyer who needs 8 percent would only pay 750,000 for the same income, so the asking price is 25 percent above that bar. The multiple is the same fact from the other side — sixteen and two-thirds years of income — and it is the number a seller is more likely to quote.

2. The same price with twice the income

   1. Cap rate: 120,000 ÷ 1,000,000 = 12 percent
   2. Price to income multiple: 100 ÷ 12 = 8.33
   3. Value at an 8 percent target: 120,000 ÷ 0.08 = 1,500,000
   4. Value gap: (1,500,000 − 1,000,000) ÷ 1,000,000 = 50 percent

   Doubling the income doubles the cap rate and halves the multiple, and it flips the value gap from −25 percent to +50 percent: the same asking price is now well below what an 8 percent buyer would pay. Nothing about the building changed, which is the lesson — the cap rate is a property of the income and the price together, never of the building alone.

3. Awkward numbers: 85,000 on 1,200,000, targeting 7.5 percent

   1. Cap rate: 85,000 ÷ 1,200,000 = 7.0833 percent, printed as 7.08
   2. Price to income multiple: 100 ÷ 7.08 = 14.12
   3. Value at a 7.5 percent target: 85,000 ÷ 0.075 = 1,133,333.33
   4. Value gap: (1,133,333.33 − 1,200,000) ÷ 1,200,000 = −5.56 percent

   The multiple is derived from the rounded 7.08 rather than from 7.0833, so dividing 100 by the printed cap rate reproduces the printed multiple exactly. That is deliberate and it is the general rule here: every figure on the panel can be checked against the others by hand, with no last-digit drift to explain away.

4. A small unit: 24,000 on 300,000

   1. Cap rate: 24,000 ÷ 300,000 = 8 percent
   2. Price to income multiple: 100 ÷ 8 = 12.5
   3. Value at a 9 percent target: 24,000 ÷ 0.09 = 266,666.67
   4. Value gap: (266,666.67 − 300,000) ÷ 300,000 = −11.11 percent

   An 8 percent cap rate on a 300,000 property and an 8 percent cap rate on a 3 million one are the same number and not the same investment — the smaller unit concentrates the same return in far less capital, and it concentrates the risk the same way. The cap rate was built to compare properties of different sizes, which it does; it was not built to tell you whether the comparison is the right one to make.

5. A tenth of a percent: 100 of income on a 1,000,000 property

   1. Cap rate: 100 ÷ 1,000,000 = 0.01 percent
   2. Price to income multiple: 100 ÷ 0.01 = 10,000
   3. Value at an 8 percent target: 100 ÷ 0.08 = 1,250
   4. Value gap: (1,250 − 1,000,000) ÷ 1,000,000 = −99.88 percent

   This is the smallest cap rate the page will print, and it marks a real boundary: a tenth of that income would round to 0.00 percent, whose reciprocal has no finite value, so the page reports the problem instead of a multiple. It also shows why the multiple column is worth reading: 0.01 percent and 10,000 years of income are the same statement, and only the second one is alarming at a glance.

This is a one-year snapshot and it sees nothing beyond it. Rent growth, vacancy rates that move, a roof that needs replacing, a tenant who leaves, the price at which the property is eventually sold — none of it is here, and for a holding period of ten years those things usually matter more than the entry yield. Financing is excluded by design, which is what makes two properties comparable but also means the number says nothing about the return on the cash you would actually put in: leverage raises the return on equity when the cap rate exceeds the borrowing cost and lowers it when it does not, and this page cannot tell you which case you are in. The income is taken as a single certain figure when it is a forecast, and the value is taken as given when it is the thing being argued about. Above all, a cap rate is a market's opinion expressed as a number: reading it as a verdict rather than a comparison is the mistake the figure invites, and one property's rate means very little without the range that similar buildings in the same market are trading at.

Should I use gross rent or net operating income?

Net operating income, always. The rent collected is not the income the property produces — vacancy, property tax, insurance, management, maintenance and any utilities the owner pays all come out first, and a cap rate built on the gross figure is inflated by however much those costs are. This is the mistake the page cannot catch for you, since a plausible-looking income figure produces a plausible-looking answer. If you do not have a net figure yet, work it out before using this page rather than entering the rent and adjusting the result afterwards.

Do mortgage payments come out of the net operating income?

No. The cap rate deliberately ignores how the purchase was financed so that a cash buyer and a leveraged buyer are looking at the same number for the same building. If you subtract the mortgage payment, what you have is a cash-on-cash return, which is a different and also useful measure — but it depends on your loan terms rather than on the property, so it cannot be compared between two buyers, and it changes the moment you refinance.

Is a higher cap rate a better investment?

Not on its own, and this is the reading the number most often gets wrong. A high cap rate means the income is cheap relative to the price, which can mean a genuine bargain or a market that expects trouble — an old roof, a weak rental area, a tenant about to leave. The rate is the market's summary of everything it knows about that property, so an unusually high one is more often a question to investigate than an answer to act on. Compare it against what similar buildings nearby are trading at, not against a number you decided in advance is good.

What does the price to income multiple add?

The same fact in the other direction. A cap rate is a yield and a multiple is a number of years of income, and they are exact reciprocals, so neither carries information the other lacks. The reason both are shown is that people quote them in different contexts — a multiple is more common in a sales listing, a cap rate in an appraisal — and having the panel give both means you can follow whichever conversation you are in without converting in your head. Watch the one coincidence: at exactly 10 percent the two are equal, which is an accident of the decimal system rather than a relationship to rely on.

What if the cap rate comes out at zero?

That happens when the income is vanishingly small next to the price — a hundred of income on a million of value rounds to 0.01 percent, and a tenth of that rounds to zero. Rather than print a zero and a multiple of infinity, the page says the income is too small relative to the value for the multiple to have a finite value. In practice a figure that low means one of the two numbers is wrong: either the income is missing most of its rent, or the value is not the price of an income-producing property.

How is this different from a gross rent multiplier?

Only the numerator, and that is the whole difference. A gross rent multiplier divides the price by gross rent; a cap rate divides it by net operating income. Because expenses are always positive, the net figure is always smaller, so a cap rate is always a lower number than the gross yield on the same property — and the gap between them is exactly what it costs to run the building. If you have both, the difference is a quick read on how expensive the property is to operate.

• Net Income — the glossary definition of income after expenses, the sense in which a cap rate's numerator has to be net rather than gross rent; the glossary's net income also deducts tax, while a cap rate stops at operating expenses, before debt service and tax — Investor.gov, U.S. Securities and Exchange Commission (United States)
• 12 CFR 1240.34, Multifamily mortgage exposures — defines net operating income as rental income less the vacancy and property operating expenses of the property: the costs that come out of the rent before it becomes net operating income, as distinct from the purchase price itself — Electronic Code of Federal Regulations (eCFR), U.S. Government Publishing Office (United States)
• Publication 527 (2025), Residential Rental Property — how rental income and the expenses of a rental property are worked out for tax, including the deductions that reduce gross rent to something closer to net income — Internal Revenue Service (United States)