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Cap rate calculator

Cap rate answers one question: what does this building earn, independent of how you paid for it. Get the expenses honest and it is the fastest comparison in the trade.

Pre-filled with the example unit at a realistic expense ratio. Operating expenses exclude the mortgage — always.

Capitalisation rate — NOI over price

4.16%

Gross annual rent
$22,200.00
Effective gross income
$21,090.00
Operating expenses
$8,100.00
Net operating income
$12,990.00
Price
$312,000.00
Cap rate
4.16%
Value at a 6% market cap
$216,500.00

What a buyer pricing at 6% would pay for this NOI.

Value at 8%
$162,375.00
Debt service never belongs in NOI. Cap rate compares properties, not financings — put the mortgage in the cash-flow tool instead.

The expense line is where cap rates lie

A listing that shows a 9% cap and a 12% expense ratio is telling you what it left out. Real operating expenses on small residential stock land far higher once vacancy, maintenance and management are funded. Rebuild the expense line from your own numbers before you compare anything.

  1. 01Property tax at the reassessed value, not the seller's frozen basis.
  2. 02Insurance at a fresh quote, not last year's renewal on their claims history.
  3. 03Maintenance and capex as reserves, not as last year's actual spend.
  4. 04Management at a market rate, even when you intend to self-manage.
  5. 05Vacancy from the local days-on-market, not from the seller's occupancy.

Using cap rate backwards to price a raise

The useful trick is the inverse. If the market prices your class of building at 6%, then every extra $100 of annual NOI is worth about $1,667 of value. A $75 monthly rent rise that sticks is $900 a year — roughly $15,000 of value at a 6% cap, before it has bought you a single month of cash flow.

Which is why expense control moves value twice

Cutting $50 a month of avoidable maintenance does the same thing as raising rent $50: it lands in NOI, and NOI is what the next buyer capitalises.

What cap rate will not tell you

  • Nothing about leverage — two identical buildings with different loans have the same cap rate and very different cash flow.
  • Nothing about the capital stack behind the roof you are about to inherit.
  • Nothing about rent that is under market and cannot be raised because the tenancy is protected.

Pair it with the cash flow calculator and, before you buy, with the rent vs sell calculator run from the seller's side.

Related in the binder

Engraved brass dividers on a ruled sheet