Cap Rate Calculator
Work out the capitalization rate — the unlevered annual yield — on any rental property by entering its value, gross rent, vacancy rate, and operating expenses. Industry-standard real-estate valuation maths used by appraisers and investors.
Cap rate
6.72%
- Effective gross income
- £45,600.00
- Net operating income
- £33,600.00
- Gross rent multiplier
- 10.42
- Implied value at 7% cap
- £480,000.00
Cap rate measures the unlevered annual return on a property: NOI divided by purchase price. NOI here is gross rent net of vacancy losses and operating expenses (taxes, insurance, repairs, management) — mortgage payments and capital expenditures are excluded. The implied value at a 7% cap shows what an investor demanding a 7% unlevered yield would pay for the same NOI.
How to use this calculator
Enter the property's purchase price or current market value, the gross annual rent it produces, an expected vacancy rate, and the annual operating expenses (taxes, insurance, repairs, management). The cap rate and net operating income (NOI) update as you type. Use the implied-value-at-7% line to sanity-check the asking price against a market yield.
How the calculation works
Effective Gross Income (EGI) = Gross Rent × (1 − Vacancy). Net Operating Income (NOI) = EGI − Operating Expenses. Cap Rate = NOI / Property Value × 100. Operating expenses include property tax, insurance, repairs, maintenance, property management, and owner-paid utilities, but NOT mortgage interest, principal, or capital expenditures — those are unlevered cash flows treated separately in cash-on-cash return and IRR analyses. The cap rate is the unlevered return an all-cash buyer would earn in year one.
Worked example
A $500,000 duplex grosses $48,000/year in rent ($4,000/month total). Expected vacancy is 5%, and annual operating expenses (tax, insurance, repairs, management) total $12,000. EGI = 48,000 × 0.95 = $45,600. NOI = 45,600 − 12,000 = $33,600. Cap Rate = 33,600 / 500,000 × 100 = 6.72%. If a buyer in this market demands a 7% unlevered yield, the implied value of this NOI is 33,600 / 0.07 ≈ $480,000 — so $500,000 is a slight premium to a 7%-cap buyer.
Frequently asked questions
What is a good cap rate?
It depends on location, asset class, and risk. Prime urban multifamily in the US, UK, or Australia typically trades at 4–6% cap rates; suburban and secondary-market properties at 6–8%; older single-family or higher-risk markets at 8–10%+. A higher cap rate generally means higher yield but also higher perceived risk or weaker capital appreciation. Compare the cap rate to comparable nearby sales rather than to a fixed benchmark.
What's the difference between cap rate and ROI?
Cap rate is unlevered — it ignores any mortgage and measures pure property yield: NOI / value. ROI (or cash-on-cash return) is levered — it measures cash flow after debt service divided by the cash you actually invested (down payment, closing costs, initial capex). For a leveraged investor, ROI is usually much higher than the cap rate when the cap rate exceeds the mortgage interest rate (positive leverage), and lower when it doesn't (negative leverage). Both metrics matter; they answer different questions.
Should I include mortgage payments in operating expenses?
No. The cap rate is unlevered by definition — it values the property independent of how it is financed. Mortgage interest and principal are debt-service items, not operating expenses. Including them would conflate the property's yield with your specific financing terms, making cap rates non-comparable across buyers. Keep mortgage out of NOI; account for it separately in cash-on-cash and IRR.
What about capital expenditures (capex)?
Capex — roof replacement, HVAC, structural repairs — is also excluded from operating expenses in the standard definition. In practice, sophisticated investors deduct a "capex reserve" (often 5–10% of gross rent, or a per-unit figure) from NOI to get a more realistic stabilised yield. This calculator follows the strict appraiser definition (no capex reserve) so cap rates are comparable to published market data; add a reserve into operating expenses yourself if you want a more conservative view.
How does cap rate relate to property value?
Inversely. For a given NOI, value = NOI / cap rate. So when market cap rates fall (yields compress), values rise; when cap rates rise, values fall. Appraisers use the direct capitalisation method — value = stabilised NOI divided by market cap rate — to estimate income-property values. The "implied value at 7% cap" line in the result shows this calculation for any chosen yield benchmark.
What is the gross rent multiplier (GRM)?
GRM = Property Value / Gross Annual Rent. It's a simpler ratio used as a quick screen — lower GRM means cheaper per dollar of rent. Unlike cap rate, GRM ignores vacancy and operating expenses entirely, so it is less informative for serious underwriting. A 10x GRM property with 60% expense ratio yields a very different cap rate than a 10x GRM property with 30% expense ratio. Use GRM to filter; use cap rate to underwrite.