Cap Rate Calculator

Cap rate — short for capitalization rate — is the unleveraged annual return an income property produces, expressed as a percentage of its price. It's net operating income divided by value, and it's the single number commercial and residential investors use to compare deals on equal footing regardless of how each is financed. A 7% cap rate means the property throws off 7% of its purchase price in net income every year before any loan payment. Because it ignores financing, two buyers looking at the same building will calculate the same cap rate even if one pays cash and the other borrows 80%.

This calculator builds NOI the way underwriters do rather than asking you to guess it. Gross rent is annualized, reduced by a vacancy and credit-loss allowance to get effective gross income, then reduced again by operating expenses — taxes, insurance, management, repairs, and reserves — entered as a percentage of that effective income. What's left is NOI. Divide NOI by the purchase price and you have the cap rate. Operating expenses deliberately exclude the mortgage and depreciation, because cap rate measures the property's performance, not the buyer's loan or tax position. Because value is so sensitive to NOI, get these expense estimates as close to the property's real numbers as you can — a few points of expense ratio can swing the cap rate, and the price it supports, materially.

The real power of cap rate is that it works backward, too: value equals NOI divided by cap rate. Set a target cap rate — the yield you'd need to make the deal worth it, or the rate comparable sales are trading at — and the calculator shows the price that income justifies and how far the asking price sits above or below it. When you're ready to layer in a loan and see the leveraged return, or structure seller financing around the purchase, the Flexi calculator picks up where this leaves off.