What is cap rate?
Capitalization rate, usually called cap rate, compares a property's net operating income with its value or purchase price. It is a quick way to describe the unleveraged operating yield of a property.
Cap rate formula
cap rate = net operating income ÷ property value × 100
net operating income = gross operating income − operating expenses
Example
A property worth $300,000 with $21,000 of annual NOI has a cap rate of 7%.
If you are trying to calculate cap rate, this page uses the same formula found in a capitalization rate calculator: annual net operating income divided by property value, expressed as a percentage.
Frequently asked questions
Does cap rate include mortgage payments?
No. Cap rate is based on net operating income before financing costs. Mortgage payments belong in cash flow and cash on cash analysis.
Can I estimate property value from a cap rate?
Yes. Divide NOI by the target cap rate expressed as a decimal.
Is a higher cap rate always better?
Not necessarily. Cap rates reflect risk, location, property quality, growth expectations, and market conditions. Compare similar properties rather than using the rate alone.