Cap Rate Calculator

Market Cap Rates by City

Related Calculators

External Resources

Frequently Asked Questions

What is cap rate?

Cap rate (capitalization rate) = Net Operating Income (NOI) / Property Value. It measures the expected annual return on a real estate investment, expressed as a percentage. A 7% cap rate means the property generates 7% of its value in annual net income. Cap rate is used to compare investment properties regardless of financing.

How is cap rate calculated?

Cap Rate = NOI / Property Value. NOI = Gross Rental Income - Vacancy Loss - Operating Expenses (excluding mortgage payments). For example: NOI = $18,000, Property Value = $300,000. Cap Rate = $18,000/$300,000 = 6.0%.

What is a good cap rate?

Good cap rates depend on market and property type. Generally: 4-6% is low (expensive markets, lower risk), 6-8% is average (balanced markets), 8-10%+ is high (secondary markets, higher risk). Compare cap rates to risk-free rates (Treasury yields) for context. A cap rate 2-4% above the 10-year Treasury is typical.

How do I use cap rate to value a property?

Property Value = NOI / Cap Rate. If a property generates $20,000 NOI and you want an 8% cap rate: Value = $20,000 / 0.08 = $250,000. This is a common way to determine the maximum price to pay for a desired return.

What is the difference between cap rate and cash-on-cash return?

Cap rate measures unleveraged return (NOI / property value). Cash-on-cash return measures leveraged return (annual cash flow / cash invested). Cap rate ignores financing; cash-on-cash includes mortgage costs. Both are useful, but cap rate is better for comparing properties while cash-on-cash shows actual return on your money.

What is a cap rate in real estate?

The capitalization rate (cap rate) is a real estate valuation metric that represents the expected rate of return on an investment property. It is calculated as NOI divided by the propertys current market value. Cap rates are the real estate equivalent of the price-to-earnings (P/E) ratio in stocks.

What factors influence cap rates?

Cap rates are influenced by: property location (urban vs rural), property type (multifamily vs retail), market conditions (supply/demand), interest rates, risk perception, growth expectations, asset quality, and local economic factors. Lower cap rates indicate higher valuations and lower perceived risk.

How do interest rates affect cap rates?

Cap rates and interest rates are correlated. When interest rates rise, cap rates typically rise (property values fall). The spread between cap rates and risk-free rates (10-year Treasury) indicates the risk premium for real estate. Historically, the spread averages 2-4%.

What is the difference between cap rate and ROI?

Cap rate is a snapshot of current income return, ignoring appreciation and financing. ROI (Return on Investment) includes total return over time: cash flow + appreciation + principal paydown - costs. Cap rate is simpler but less comprehensive. ROI is more meaningful for evaluating overall investment performance.

What is a negative cap rate?

A negative cap rate means the property has negative NOI (expenses exceed income). This can happen with vacant properties, properties needing major repairs, or properties with very high operating costs. Investors might accept negative cap rates if they expect significant appreciation or value-add potential.

How do I calculate NOI for cap rate?

NOI = Gross Potential Rent - Vacancy & Credit Loss - Operating Expenses. Operating expenses include: property management, taxes, insurance, repairs/maintenance, HOA fees, utilities (if paid by owner), and other operating costs. NOI excludes: mortgage payments, capital expenditures, income taxes, and depreciation.

What is a market cap rate?

Market cap rate is the average cap rate for properties in a specific market, property type, and quality tier. It is used as a benchmark for pricing properties and assessing investment returns. Market cap rates are published by real estate research firms and local market reports.

How does property condition affect cap rate?

Properties in better condition typically have lower cap rates (higher prices) because they require less immediate capital expenditure. Distressed properties may have higher cap rates to compensate for needed repairs and higher risk.

What is the cap rate for multifamily vs single-family?

Multifamily properties (5+ units) typically have lower cap rates (5-7%) than single-family rentals (6-9%) because they are professionally managed, have economies of scale, and are easier to finance. Single-family homes have higher cap rates due to more intensive management and higher per-unit costs.

How does lease structure affect cap rate?

Properties with long-term, triple-net leases (NNN) to credit tenants typically have lower cap rates (higher prices) because income is more predictable. Properties with short-term or month-to-month leases have higher cap rates due to higher vacancy risk.

What is the relationship between cap rate and property value?

Cap rate and property value are inversely related. Higher cap rate = lower value (for the same NOI). Lower cap rate = higher value. When cap rates compress (decrease), property values increase. When cap rates expand (increase), property values decrease.

How do I find cap rates for properties?

Research market cap rate reports from CBRE, Cushman & Wakefield, Marcus & Millichap, and local real estate investment associations. Realtors and appraisers can provide local cap rate data. Online tools like Crexi and RealCapital Analytics also provide market data.

What is a pro forma cap rate?

A pro forma cap rate uses projected (future) NOI rather than current NOI. It is commonly used for value-add properties where the investor plans to increase rents or reduce expenses after acquisition. Pro forma cap rates are typically lower than the purchase cap rate.

What is the band of investment method?

The band of investment method calculates cap rate as a weighted average of the mortgage constant (debt) and the equity dividend rate. It incorporates financing costs into the cap rate calculation. This method is used by appraisers to derive market cap rates.

How does cap rate change over time?

Cap rates fluctuate with market conditions, interest rates, and property performance. A property purchased at a 7% cap rate might see its cap rate compress to 5% if values rise or expand to 9% if values fall or income declines.

What is the difference between going-in and terminal cap rate?

Going-in cap rate = purchase NOI / purchase price. Terminal cap rate = projected NOI at sale / projected sale price. Terminal cap rates are typically higher than going-in cap rates to account for depreciation, market uncertainty, and transaction costs.

What is a cap rate compression?

Cap rate compression is when cap rates decrease over time, indicating that property values are rising faster than NOI. This often occurs in hot markets with strong investor demand. Compression increases property values and can benefit sellers, while expansion (rising cap rates) benefits buyers.

How does cap rate relate to risk?

Higher cap rates generally indicate higher risk (or lower growth expectations). Lower cap rates indicate lower perceived risk or higher growth expectations. The risk premium is the spread between the cap rate and the risk-free rate. A wider spread means more compensation for risk.

What is the cap rate for self-storage properties?

Self-storage cap rates typically range from 6-9% depending on market and quality. They are often higher than multifamily but lower than retail. Self-storage has become an institutional asset class with growing investor interest.

How do I use cap rate to compare investments?

Compare cap rates across similar property types and markets. Adjust for differences in: property condition, lease structure, growth potential, and risk. A 6% cap rate in a growing market may be better than an 8% cap rate in a declining market when factoring in appreciation.

What is the difference between nominal and stabilized cap rate?

Nominal cap rate uses current NOI (which may include temporary factors like vacancies or below-market rents). Stabilized cap rate uses projected NOI assuming normal occupancy and market rents. Stabilized cap rate is more useful for comparing normalized returns.

How does depreciation affect cap rate?

Cap rate is calculated before depreciation (depreciation is a non-cash expense). Depreciation provides tax benefits that enhance after-tax returns but does not affect the cap rate calculation. The cap rate should be evaluated alongside tax benefits for a complete picture.

What is a cap rate for REITs?

REIT cap rates vary by property type and can be calculated as FFO (Funds From Operations) / property value. Public REITs typically trade at lower implied cap rates (4-6%) than private market transactions due to liquidity, diversification, and professional management.

How do I calculate the cap rate for a property I already own?

Current Cap Rate = Current NOI / Current Market Value. If your property generates $24,000 NOI and is worth $400,000: Cap Rate = $24,000/$400,000 = 6%. This helps evaluate whether to hold, sell, or refinance the property.

What is the Gordon Growth Model for cap rates?

The Gordon Growth Model estimates cap rate as: Cap Rate = Discount Rate - Growth Rate. If investors require a 10% return and expect 3% NOI growth: Cap Rate = 10% - 3% = 7%. This model explains why high-growth markets have lower cap rates.

What is the difference between cap rate and yield?

Cap rate is specifically NOI / Property Value. Yield can refer to gross yield (rent / value) or net yield (same as cap rate). In practice, cap rate and net yield are often used interchangeably in real estate.

How do I interpret a 6% cap rate?

A 6% cap rate means the property generates 6% of its value in annual net income. If you pay $300,000 for a property with 6% cap rate, you can expect $18,000/year in NOI. Before financing, this is a 6% return. After financing (20% down, 6.5% rate), your cash-on-cash return might be different.