Cap Rate Calculator for Rental Property: Formula, NOI & Example

Cap rate measures a rental property’s net operating income relative to its value before financing. The formula is simple, but the result is only useful if NOI is calculated consistently.

Cap rate = Net Operating Income ÷ Property Value × 100

What cap rate tells you

Cap rate shows how much annual operating income a property produces relative to its value, before mortgage payments, investor-specific taxes, or financing structure are considered.

It is useful for comparing similar income properties, but it is not a complete measure of total investment return or risk.

Step 1: Calculate effective rental income

Start with scheduled annual rent, then account for realistic vacancy and add other recurring property income where applicable.

Effective income = scheduled rent − vacancy/credit loss + other property income

Step 2: Add operating expenses

Operating expenses can include:

• property taxes;
• insurance;
• property management;
• routine maintenance;
• owner-paid utilities;
• landscaping;
• HOA or community fees where appropriate;
• other recurring property-operating costs.

Step 3: Calculate NOI

NOI = effective income − operating expenses

NOI should describe the property’s operation before financing. That consistency is what makes cap rate useful for comparison.

What should not be in NOI for standard cap-rate analysis?

Typically exclude:

• mortgage principal;
• mortgage interest/debt service;
• income taxes;
• depreciation expense;
• investor-specific financing costs;
• major capital expenditures treated separately from normal operating expenses.

Different underwriting models can treat reserves differently, so label your assumptions.

Step 4: Choose the property value

For acquisition analysis, investors often use purchase price. For a current holding analysis, market value may be more relevant. Do not compare one property using purchase price with another using current market value without recognizing the difference.

Cap-rate example

Assume:

• property value: $350,000;
• annual effective rental income: $36,000;
• annual operating expenses: $12,500;
• NOI: $23,500.

$23,500 ÷ $350,000 × 100 = 6.71% cap rate

What does a 6.71% cap rate mean?

It means the property’s modeled NOI equals about 6.71% of the value used in the calculation before financing.

It does not mean the investor earns 6.71% cash-on-cash, and it does not guarantee future performance.

Cap rate vs cash-on-cash return

Cap rate ignores financing. Cash-on-cash return includes the effect of debt service and compares annual pre-tax cash flow with the investor’s actual cash invested.

Two buyers can have the same cap rate on the same property but different cash-on-cash returns because their loans and initial cash contributions differ.

Cap rate vs ROI

ROI is broader and can include financing, cash flow, appreciation, principal paydown, selling costs, and other gains or losses depending on the formula used. Cap rate is deliberately narrower.

See Rental Property ROI Calculator.

Do not use gross rent in the numerator

Using gross rent instead of NOI produces a different metric and can make an expense-heavy property look better than it really is. Cap rate should be based on net operating income.

Vacancy matters

If the property produces $36,000 in scheduled rent but historically loses several weeks each year to vacancy and turnover, use a realistic effective-income figure rather than assuming every night or month is occupied.

Maintenance matters

A property with older systems can show an attractive gross rent but weak NOI once maintenance and management are included. Use actual historical expenses where available.

One-time renovations should be analyzed separately

Major capital work can still be economically important even though it is not treated as a normal recurring operating expense inside standard NOI. Keep a separate capital-expenditure plan so cap rate does not hide upcoming cash needs.

Property management belongs in a realistic model

If you currently self-manage, you may still choose to model a management expense when comparing the property with a professionally managed alternative. Label that choice clearly.

There is no universal “good cap rate”

A cap rate cannot be judged without market, property type, condition, tenant quality, lease structure, growth expectations, financing environment, and risk. A higher cap rate can reflect higher income, lower price, or higher perceived risk.

Use it as a comparison tool, not a universal pass/fail score.

Cap-rate comparison checklist

• same NOI definition used;
• vacancy included consistently;
• operating expenses complete;
• debt service excluded;
• property value basis consistent;
• capital needs reviewed separately;
• market and property type comparable;
• historical and projected NOI clearly labeled.

Improve cap-rate accuracy with real records

After you own the property, replace estimates with actual taxes, insurance, repairs, utilities, management, and vacancy data. This turns a marketing estimate into a more defensible operating analysis.

Use Rental Property Income & Expense Log to build the expense history.

Where the Property Management Binder fits

The Property Management Binder helps organize maintenance, vendor, inspection, insurance, improvement, and property records that improve your NOI assumptions over time.

Frequently asked questions

What is the cap-rate formula?

Cap rate = annual NOI divided by property value, multiplied by 100.

Does cap rate include mortgage payments?

No. Standard cap-rate analysis is calculated before debt service.

Should I use purchase price or market value?

Use the value appropriate to your analysis and apply the same approach consistently when comparing properties.