Cap Rate Calculator & Solver

How to calculate cap rate, step by step

The capitalization rate is net operating income divided by the property’s price or value, written as a percentage. Three steps get you there, and almost every disagreement about a cap rate comes from the first one.

1. Build the net operating income. Start with gross rent and other income, subtract an allowance for vacancy and credit loss, then subtract operating expenses: taxes, insurance, utilities, repairs, management and reserves. Leave out mortgage payments, depreciation and capital improvements — the cap rate describes the property, not how it is financed. For example, $240,000 of rent plus $6,000 of parking and laundry income, less a 5% vacancy allowance ($12,300), is $233,700 of effective income; take away $83,700 of operating expenses and the NOI is $150,000.
2. Divide by the price. Use the purchase price for a deal you are buying, or the appraised or market value for one you own.
3. Multiply by 100. At a $2,000,000 price, that $150,000 of NOI is a cap rate of 7.50%.

The same identity runs in every direction, which is what the solver above does. Value is NOI divided by the cap rate, so $150,000 capitalized at 7.50% is $2,000,000 again. NOI is value multiplied by the cap rate. And once you add a loan, the cap rate divided by the loan-to-value ratio gives the debt yield a lender will test — the debt yield calculator takes it from there. If you need to build the NOI itself line by line, with vacancy and reserves, the commercial real estate investment calculator does that before it sizes any debt.

Why the cap rate is the number everything else hangs off

A capitalization rate is a price, not a forecast. It states what the market currently demands in annual unleveraged yield for a given income stream, and dividing income by it produces the price that yield implies. Everything downstream — proceeds, equity, coverage, the exit — moves with it.

What makes it worth a dedicated solver is that the relationship is not symmetric. Income sits on top of the fraction and the rate sits underneath, so a five percent rise in NOI is a five percent rise in value, always. A fifty basis point fall in the cap rate is worth 7.7% at a 7.00% starting point and 11.1% at 5.00%. The same move, half again as much money, purely because of where you started. That asymmetry is why cap rate compression drove so much of the last cycle's returns and why expansion has hurt so disproportionately since.

Reading a cap rate off a transaction

The most common professional use of this arithmetic is backwards. A broker quotes a price and an NOI; you want the cap rate to compare against your own pipeline. A lender quotes a loan amount and a leverage ratio; you want the valuation they underwrote to, which is frequently below the contract price and is the real reason proceeds came in light. Both are one field left blank here.

Benchmarks and where the disagreements come from

Cap rates are market data and move constantly, so any table of them is stale on publication. What is stable is the ordering — the risk premium between asset classes and between markets — and the ratios that fall out of the arithmetic.

• Debt yield equals the cap rate divided by leverage. A 7.00% cap rate at 70% LTV is a 10.00% debt yield, always (debt yield calculator). If a lender holds a 10% floor, that single identity tells you the maximum leverage available on the asset before you ask.
• The net income multiplier is one divided by the cap rate. A 7.00% cap is 14.29x NOI. Useful when a counterparty talks in multiples and you think in yields.
• Exit caps are conventionally 25 to 50 basis points above going-in. The asset is older at sale. A model using the same rate at both ends is assuming the market does you a favor by standing still.