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Cap rate

What capitalization rate does this rental's NOI produce at the price you would pay?

Your numbers

Cap rate

6%

Years of NOI to recover price16.67
NOI per $100,000 of price$6,000

Tip. Educational estimate with the assumptions listed on this page. Not tax, legal, or investment advice.

Assumptions

  • NOI is rent minus operating expenses and vacancy, before debt service.
  • Cap rate is not cash-on-cash and ignores financing.
  • Appreciation is excluded.

Explore the numbers

Examples

Load a scenario, then change one input at a time.

Example 1

6% cap

$24k NOI on $400k.

Cap rate

6%

Example 2

Tight 4.5%

Same NOI, higher price.

Cap rate

4.5%

Example 3

Value-add

NOI after a rent bump.

Cap rate

8%

What this calculates

Divide annual net operating income by purchase price to get cap rate and the years of NOI needed to recover price.

How to use it

  1. Build NOI from trailing rent and real expenses, not the listing's pro forma.
  2. If the seller quotes a cap, rebuild NOI yourself.
  3. Compare cap to local debt cost. A 5% cap with 7% money is a leverage warning.

Common mistakes

  • Using net cash flow after the mortgage as NOI.
  • Leaving out taxes, insurance, and management.
  • Comparing cap rates across markets with different risk.

Formula

Cap rate = NOI ÷ purchase price.

FAQ

Is a higher cap always better?

It usually means more risk, more deferred maintenance, or a cheaper market. Read the NOI quality.

Does cap rate include the loan?

No. That is cash-on-cash and DSCR.

What about STR income?

Use a conservative net, not a peak-season annualization.

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