Cap Rate Calculator
Divide NOI by price to get the capitalisation rate, then invert it to value a property from its income. Shows what cap rate expansion does to value — the risk most investors underestimate.
Cap Rate Calculator
Results recalculate instantly on every keystroke. Nothing you type is transmitted.
What this result does not account for
- A single-period measure that assumes the current NOI continues indefinitely with no growth.
- Unlevered by construction; it says nothing about your return after financing.
- Only comparable between assets of the same class, quality and market whose NOI was built on the same conventions.
In short: Cap rate is net operating income divided by property value. At 84,240 of NOI on a 1,050,000 price the cap rate is 8.02%. Rearranged, value equals NOI divided by the cap rate, which is why a rising cap rate destroys value even when income is unchanged.
Formula
cap rate = NOI ÷ value
value = NOI ÷ cap rate · value multiple = 1 ÷ cap rate
[('NOI', 'annual net operating income, unlevered'), ('value', 'purchase price or current market value'), ('cap rate', "the market's required unlevered yield"), ('1 ÷ cap', 'value added per dollar of extra NOI')]
Worked Example
- Establish NOI on a consistent basis — real vacancy, real management fee, and state whether reserves are deducted.
- Divide NOI by the price to get the cap rate the deal is offered at.
- Compare that against the prevailing cap rate for the same asset class and submarket.
- To value from income instead, divide NOI by the market cap rate.
- Stress the result: recompute value with the cap rate 100 basis points higher and see whether the equity survives.
84,240 of NOI on a 1,050,000 price is a cap rate of 8.0229%, a value multiple of 12.46. If cap rates expand by 100 basis points to 9.0229% while NOI stays flat, the value falls to 933,516 — a loss of 116,484, or 11.09%, with no change whatever to the building. On a 25% equity stake that is a 44% loss of equity.
Strengths & Limits Of This Model
Where this engine is strong
- Values from income and prices from value in one pass
- Quantifies the equity risk in 100 bps of cap rate expansion
- Converts an expense saving into capitalised value
Where it stops
- Ignores financing, capex, growth and tax
- Meaningless where NOI is negative
Practical Use Cases
Screening a listing
Testing whether the asking price implies a cap rate in line with the submarket.
Valuing from income
Applying a market cap rate to NOI to produce an income-approach value.
Stress-testing an exit
Seeing what a 100 basis point cap rate move does to the equity.
Pricing an operating improvement
Converting an annual expense saving into the value it creates.
Comparing markets
Placing a primary-market asset beside a secondary-market one on an unlevered basis.
Methodology & Editorial Standards
The cap rate is NOI divided by value, and the inverse is applied to produce an income-approach valuation at the market rate you supply. The expansion scenario adds exactly 100 basis points to the computed rate and revalues the same NOI, which isolates the pricing effect from any change in operations. Non-positive NOI is refused rather than shown as a meaningless rate, because the income approach genuinely does not apply to an asset that does not produce income.
Computation runs in IEEE-754 double precision at full internal precision; rounding to two decimal places occurs strictly at the display layer, so no cumulative drift enters the result. All monetary outputs use accounting presentation — grouped thousands, two decimals, negatives in parentheses — so figures can be transcribed directly into a model or working paper. Division-by-zero and out-of-domain inputs return an em-dash rather than a misleading number.
This engine was reconciled against an independent reference implementation and hand-verified for the worked example above before release. Our full five-stage review process is published on the About Us page.
Disclaimer. This calculator is provided for informational and modelling purposes only and does not constitute financial, tax, legal, medical, or engineering advice. Verify all figures with a qualified professional before acting on them.
Cap Rate Calculator — 10 Expert FAQs
10 analyst-written answers to the questions practitioners actually ask — optimised for voice and answer-engine retrieval.
What is a good cap rate?
There is no universal answer, and treating a high cap rate as good is the classic beginner's error. Cap rates price risk: stabilised assets in deep, liquid markets trade at low caps, while secondary markets, older stock and shorter leases trade higher. A 9% cap in a thin market may be worse risk-adjusted value than a 5.5% cap in a strong one. Compare only like with like.
Does the cap rate include the mortgage?
No. Cap rate is unlevered by construction, because NOI excludes debt service. That is what allows two buyers with completely different loans to agree on a price. For the levered return use the Cash On Cash Return Calculator.
Is the cap rate my return?
Only in the narrow case of an all-cash purchase with no capital spending and flat income forever — which never happens. It ignores financing, capex, growth and tax. Treat it as the market's pricing yield, not as a forecast of what you will receive.
Why does a higher cap rate mean a lower value?
Because value is NOI divided by the cap rate, so the cap rate sits in the denominator. Doubling the cap rate halves the value of the same income. Cap rate expansion is therefore the principal risk in a leveraged deal: the income can be perfectly stable while the equity is wiped out by a repricing.
How much is 100 basis points of cap rate worth?
More than most people expect. Moving from 8% to 9% cuts value by about 11%. Because equity is the thin slice at the top of the capital stack, that 11% fall in asset value can be a 40% or greater fall in equity at 75% leverage.
Should I use in-place or pro-forma NOI?
In-place for what you are buying, pro-forma for what you intend to create — and never mix them. Applying a market cap rate to pro-forma NOI values a building that does not exist yet. If you underwrite improvements, discount them for time, cost and the risk they do not materialise.
What is the relationship between cap rate and yield?
The net rental yield on price IS the cap rate; they are the same ratio. Gross yield differs, because it divides gross rent rather than NOI by the price. The Rental Yield Calculator sets the gross and net figures side by side.
Do cap rates apply to single-family rentals?
The arithmetic works, but the market does not price them that way. Houses are largely valued on comparable sales to owner-occupiers, who do not compute cap rates at all. Cap rates dominate where the buyer pool is investors: apartments, retail, industrial and office.
What is the reversion or terminal cap rate?
The cap rate assumed when the property is sold at the end of the hold. Prudent underwriting sets it at least 25 to 50 basis points above the going-in cap, because assets age and markets cycle. A model that assumes an exit at a lower cap rate than purchase is quietly forecasting the market rather than underwriting the asset.
Why do two brokers quote different cap rates on one building?
Because NOI is not standardised. Different vacancy assumptions, a management fee included or omitted, and reserves deducted or not can each move NOI by several percent, and every percent of NOI moves the cap rate proportionally. Always ask what is in the NOI before comparing the rate.