Cap Rate Calculator
Capitalization rate and net operating income from rent, vacancy, and operating expenses.
Vacancy costs $1,200 a year here. Cap rate is unlevered on purpose, so it compares properties regardless of how each is financed. It says nothing about your return, which depends on your loan.
Capitalization rate is net operating income divided by price. It is the yield a property throws off before any financing, which is exactly what makes it useful: two buildings can be compared on the same footing even when one was bought with cash and the other with 80% leverage.
Worked example. A $250,000 duplex renting for $2,000 a month is $24,000 of gross rent. Add nothing else, lose 5% to vacancy, and effective gross income is $22,800. Subtract $8,000 of operating expenses and NOI is $14,800, a 5.92% cap rate.
Frequently asked questions
What is a good cap rate?
It depends entirely on the market and the risk. Stabilised property in a major metro might trade at 4 to 5%, while a secondary market or an older building with more turnover might need 7 to 8% to be worth owning. A high cap rate is compensation for something: vacancy risk, deferred maintenance, or a weaker location. Compare against nearby sales of similar properties, not a national number.
Should the mortgage be in operating expenses?
No. Cap rate is unlevered by definition, so principal and interest are excluded. Include them and you are no longer measuring the property, you are measuring your loan. Use cash-on-cash return for the financed view.
What expenses do people forget?
Capital expenditure reserves, property management even if you self-manage, and turnover costs. A roof lasts 25 years and then costs $12,000, which is about $40 a month whether or not you set it aside. Analyses that skip reserves consistently overstate NOI.
How does vacancy affect the calculation?
Vacancy is subtracted from gross income before expenses, giving effective gross income. Even a strong rental rarely runs at 100%: a single month of turnover in a year is roughly 8%. Using 0% vacancy is the fastest way to make a marginal deal look acceptable.
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Calculators model hypothetical outcomes from the inputs you provide. They are informational only, not financial, investment, tax, or legal advice.