How to Calculate Cap Rate

What is Cap Rate?

The capitalisation rate (cap rate) is a real estate metric that expresses a property's net operating income as a percentage of its value. It gives investors a quick way to compare properties independent of financing.

Formula

Cap Rate = NOI / Property Value × 100% | NOI = Gross rent − Operating expenses

CR: Capitalization Rate (%)
NOI: Net Operating Income ($)
PV: Property Value ($)

Step-by-Step Guide

1Cap Rate = Net Operating Income ÷ Property Value × 100
2NOI = Annual Rent − Operating Expenses (excl. mortgage)
3Higher cap rate = higher yield but often higher risk
4Typical residential cap rates range from 4–10%

Worked Examples

Input

$24,000 NOI on a $300,000 property

Result

8% cap rate — strong for residential

Input

$50,000 NOI on a $1,000,000 property

Result

5% cap rate — typical for commercial prime locations

Frequently Asked Questions

What is a good cap rate?

A good cap rate depends on market conditions and risk tolerance. Residential typically ranges 4–8%, while commercial may be 5–10%. Higher rates indicate higher yields but may imply higher risk.

Why does cap rate ignore financing?

Cap rate measures the property's intrinsic income generation, independent of how it's financed. This allows fair comparison between properties financed differently.

How does cap rate relate to ROI?

Cap rate is the first-year cash-on-cash return for an all-cash purchase. For leveraged deals, actual ROI depends on down payment and mortgage terms.

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