Cap Rate Calculator
Cap rate is net operating income divided by price — what the property yields before financing. Enter rent and expenses to get the cap rate, and the cash-on-cash return that tells you what your own money earns.
Cap rate ignores your mortgage, on purpose
Cap rate is NOI ÷ purchase price, and NOI deliberately excludes debt service.
That is the point. Two buyers can pay the same price for the same building with completely different loans, and the property's own performance should not change because of it. Cap rate measures the asset; cash-on-cash measures your deal.
Use cap rate to compare properties against each other and against the market. Use cash-on-cash to decide whether this particular purchase, with this particular financing, is worth your money.
The three expenses beginners leave out
Most first-time analyses show a cap rate one to two points higher than reality, almost always for the same three reasons.
Capital reserves. The roof, the HVAC, the water heater — all of them fail eventually, and none of them appear in last year's expenses. Setting aside 5% of rent monthly is not conservative, it is arithmetic: a $9,000 roof over a 20-year life is $37 a month, and that is one item.
Vacancy. Turnover is guaranteed. Even a well-run single family rental loses a few weeks between tenants, and that is before a bad-debt month. Using 0% vacancy invalidates everything downstream.
Management. Enter it even if you self-manage. Your time has value, and more importantly, a future buyer will price the property with management included. Analysing without it means you are counting your own labour as return.
The expense ratio output is your check. If operating expenses come to less than about 35% of effective gross income, you have almost certainly left something out. Typical residential runs 35 to 50 percent.
DSCR — the number the lender cares about
Debt service coverage ratio is NOI divided by annual mortgage payments. Most commercial lenders want 1.20 or better, meaning the property earns 20% more than the loan costs.
Below 1.0, the property cannot cover its own debt and you are funding it from elsewhere. Checking this before you make an offer saves a lot of wasted time.
On the 1% rule
The 1% rule — monthly rent should be at least 1% of purchase price — is a screening shortcut, not a valuation method. It was a reasonable filter when rates were near zero and it is much harder to satisfy now, particularly in appreciating coastal markets where investors accept lower yield in exchange for growth.
Treat it as a first pass to decide what deserves a real analysis. The cap rate and cash-on-cash outputs above are the actual decision.
What cap rate is "good"
There is no universal answer, only comparison. Cap rates are set by the local market and reflect risk: a stabilised property in a strong metro might trade at 4 to 5 percent, while an older building in a weaker market might need 8 to 10 percent to attract a buyer.
A high cap rate is not automatically a better deal. It usually means the market is pricing in risk — deferred maintenance, a soft rental market, a declining area, or a tenant base with credit problems. Compare against recent sales of similar properties in the same submarket, not against a national number.
Frequently asked questions
What is a good cap rate?
It depends entirely on the market. Stabilised properties in strong metros often trade at 4 to 5 percent, while older buildings in weaker markets may need 8 to 10 percent to attract buyers. A high cap rate usually reflects higher risk rather than a better deal, so compare against recent sales of similar properties in the same submarket.
Does cap rate include the mortgage?
No. Net operating income deliberately excludes debt service, so cap rate measures the property itself regardless of how it is financed. To see what your own money earns given your specific loan, use the cash-on-cash return instead.
How do you calculate NOI?
Take gross rental income plus any other income, subtract vacancy and credit loss to get effective gross income, then subtract all operating expenses — taxes, insurance, maintenance, capital reserves, management, and other costs. Do not subtract mortgage payments, depreciation, or income taxes.
Should I include property management if I manage it myself?
Yes. Your time has value, and a future buyer will underwrite the property with management costs included. Leaving it out inflates your cap rate by roughly a percentage point and counts your own unpaid labour as investment return.
Is the 1% rule still useful?
Only as a quick screening filter to decide which listings deserve a full analysis. It was easier to satisfy when interest rates were near zero and is now rarely met in appreciating markets, where investors accept lower current yield in exchange for growth. The cap rate and cash-on-cash figures are the real decision.