Capitalization Rate (Cap Rate)
--
NOI divided by Purchase Price
Net Operating Income
--
Annual NOI
Effective Gross Income
--
After vacancy loss
Total Annual Expenses
--
Operating costs (OpEx)
🏢 Property Details, Income, and Expenses
Property Value
$
Income (Monthly)
$
$
5.0%
Operating Expenses (Annual)
$
$
8.0%
$
$

Do not include mortgage payments (debt service) or depreciation here. Cap rate measures property performance independent of financing.

📖 Key Terms Explained
Capitalization Rate (Cap Rate)
The ratio of a property's Net Operating Income to its purchase price, expressed as a percentage. It tells you the unlevered yield you would earn if you paid all cash.
Net Operating Income (NOI)
The annual income remaining after all operating expenses are subtracted from Effective Gross Income. It does not include mortgage payments or depreciation.
Gross Potential Income (GPI)
The maximum annual income a property could collect if it were 100% occupied and every tenant paid in full. GPI equals total monthly income multiplied by 12.
Effective Gross Income (EGI)
Gross Potential Income minus an allowance for vacancy and credit loss. EGI represents the income a property realistically collects after accounting for empty units and non-paying tenants.
Operating Expenses (OpEx)
All recurring costs of running the property - taxes, insurance, management fees, maintenance, and utilities. Mortgage payments and depreciation are excluded from OpEx in a cap rate analysis.
Vacancy Rate
The estimated percentage of gross income lost to unoccupied units or tenants who fail to pay. A typical assumption is 5%, though this varies by market and property type.
Debt Service
The total annual mortgage payment including principal and interest. Debt service is intentionally excluded from cap rate calculations so the metric reflects property performance rather than financing structure.
Cash-on-Cash Return
Annual pre-tax cash flow after debt service divided by total cash invested (down payment plus closing costs). Unlike cap rate, cash-on-cash return reflects the impact of financing on your actual out-of-pocket return.

The Complete Guide to Cap Rate and NOI for Rental Properties

Whether you are evaluating your first rental property or comparing a portfolio of commercial assets, cap rate and NOI are the two numbers every real estate investor needs to understand. This guide explains the math, the meaning, and the practical limits of both metrics.

How to Use This Calculator

Start with the Property Value panel and enter the current market value or the price you are considering paying. In the Income panel, enter the gross monthly rent collected across all units, any additional monthly income sources (parking, laundry, pet fees, storage), and adjust the vacancy slider to reflect your local market or a conservative estimate. In the Operating Expenses panel, fill in your annual property tax bill, insurance premium, and other recurring costs. The management fee slider automatically calculates a percentage of EGI. All metrics update in real time as you type - no calculate button is needed.

Understanding the Cap Rate Formula

Cap rate equals Net Operating Income divided by the purchase price, multiplied by 100 to express it as a percentage. For example, a property that generates $30,000 in NOI and costs $500,000 has a cap rate of 6.0%. This means if you paid all cash for the property, you would earn a 6.0% annual return on your investment before accounting for appreciation or tax benefits.

Cap rate is most useful for comparing properties of similar type and location. A 6% cap rate in Manhattan represents a very different risk profile than a 6% cap rate in a rural Ohio town. Always interpret cap rates relative to local market benchmarks and the specific property class.

The Income Waterfall: GPI to EGI to NOI

The calculation follows a three-step waterfall. First, Gross Potential Income (GPI) is the theoretical maximum if every unit were occupied every day and every tenant paid on time. Second, you subtract a vacancy and credit loss allowance to arrive at Effective Gross Income (EGI), which is what the property actually collects in a realistic scenario. Third, you subtract all operating expenses from EGI to reach NOI, the true bottom-line income the property generates before financing costs.

Why Mortgage Payments Are Excluded

Mortgage payments are a function of how you finance the deal, not how the property performs. Two investors buying the same property at the same price will have identical NOIs and cap rates even if one pays cash and the other puts 5% down. Excluding debt service makes cap rate a clean, apples-to-apples property comparison metric. Once you know the cap rate, you can layer in your specific financing terms to calculate cash-on-cash return, which does reflect your personal investment structure.

Reading the Cap Rate Signal

This calculator uses a color signal to help interpret your result. A cap rate above 3% is shown in green, indicating a yield that at minimum exceeds what many safe fixed-income instruments offer. A cap rate between 1% and 3% turns amber, suggesting a very compressed yield that may reflect strong appreciation expectations but leaves little income margin for error. A cap rate below 1% turns red, which typically indicates the income alone does not justify the purchase price at current expenses - common in ultra-premium markets but a flag worth investigating carefully.

Frequently Asked Questions

A good cap rate depends heavily on the market and property type. In high-demand urban markets, cap rates of 4% to 6% are common for stabilized assets. In secondary or rural markets, 7% to 10% is more typical. Below 3% generally signals a very low yield or an overvalued property relative to income. Above 10% may indicate higher risk or a distressed asset. Always compare to local market benchmarks rather than a single universal threshold.
Cap rate measures a property's performance independent of how it is financed. Mortgage payments (debt service) are a financing cost specific to each buyer's loan terms, not a property-level operating cost. By excluding debt service, cap rate lets investors compare any two properties on equal footing, regardless of down payment size or interest rate. Two investors buying the same property at the same price will always get the same cap rate, even if one pays cash and the other puts 20% down.
The vacancy rate reduces Gross Potential Income to Effective Gross Income before any expenses are calculated. For example, with a 5% vacancy rate, a property generating $60,000 per year in gross rent only collects $57,000 in effective income. That lower EGI then feeds into both the management fee calculation and the final NOI, so even a small change in vacancy has a compounding effect on your bottom-line yield.
Cap rate is a property-level metric that ignores financing entirely. It equals NOI divided by the property's purchase price, and it stays the same no matter how you structure the deal. Cash-on-cash return is an investor-level metric that measures the annual pre-tax cash flow (after debt service) divided by the total cash you actually invested, typically your down payment plus closing costs. Cash-on-cash return is more useful for comparing leveraged deals, while cap rate is better for comparing properties across different markets.
No. Every calculation runs entirely in your browser. No numbers you enter are ever transmitted, saved, or shared with any server. Your property data is completely private.