Quick Answer

A property valued at $400,000 generating $24,000 per year in net operating income has an estimated cap rate of approximately 6.00%.

Annual Net Operating Income ($)

Rental income minus operating expenses (before mortgage)

Property Value / Purchase Price ($)

Common Examples

Input	Result
$24,000 NOI, $400,000 property value	Estimated cap rate: approximately 6.00%
$36,000 NOI, $500,000 property value	Estimated cap rate: approximately 7.20%
$18,000 NOI, $300,000 property value	Estimated cap rate: approximately 6.00%
$60,000 NOI, $1,000,000 property value	Estimated cap rate: approximately 6.00%
$15,000 NOI, $250,000 property value	Estimated cap rate: approximately 6.00%

How It Works

This calculator uses the standard capitalization rate formula:

Cap Rate = (Net Operating Income / Property Value) x 100

Where:

• Net Operating Income (NOI) = annual rental income minus all operating expenses (property taxes, insurance, maintenance, property management, vacancies), but before mortgage payments and income taxes
• Property Value = the current market value or purchase price of the property
• Cap Rate = the ratio of NOI to property value, expressed as a percentage

What NOI Includes and Excludes

NOI includes: gross rental income, minus vacancy losses, property taxes, insurance, maintenance and repairs, property management fees, utilities (if landlord-paid), and HOA dues.

NOI excludes: mortgage payments (principal and interest), income taxes, capital expenditures, and depreciation. These are excluded because they vary by owner and financing structure, not by the property itself.

Interpreting the Cap Rate

A higher cap rate indicates a higher return relative to the property price, but often comes with higher risk or lower appreciation potential. A lower cap rate suggests a more expensive property relative to its income, but may indicate a more stable or appreciating market. Cap rates vary significantly by location, property type, and market conditions.

Worked Example

A rental property generates $3,000/month in gross rent ($36,000/year). After subtracting $12,000 in annual operating expenses (taxes, insurance, maintenance, management), the NOI is $24,000. If the property is valued at $400,000, the estimated cap rate = $24,000 / $400,000 x 100 = 6.00%. This means the property generates an estimated 6% annual return based on its value, before financing costs.

Related Calculators

Home Affordability Calculator

Estimate how much house you can afford based on income, debts, down payment, and current interest rates.

ROI Calculator

Calculate return on investment (ROI) and annualized returns for any investment or project.

Mortgage Calculator

Estimate your monthly mortgage payment, total interest, and total cost based on loan amount, interest rate, and term.

Frequently Asked Questions

What is a cap rate?

A capitalization rate (cap rate) is the ratio of a property's net operating income (NOI) to its value, expressed as a percentage. It provides a standardized way to compare the income-generating potential of different properties regardless of their financing. A 6% cap rate means the property generates 6% of its value in net operating income per year.

What is a good cap rate?

Cap rates vary widely by location, property type, and market conditions. In major metropolitan areas, cap rates of 4% to 6% are common. In smaller markets or higher-risk areas, cap rates of 7% to 10% or higher are typical. There is no single 'good' cap rate; it depends on the investor's goals, risk tolerance, and the specific market.

What is net operating income (NOI)?

NOI is the annual income a property generates after subtracting all operating expenses, but before mortgage payments and income taxes. Operating expenses include property taxes, insurance, maintenance, property management fees, and vacancy allowances. NOI represents the property's earning power independent of how it is financed.

Does cap rate account for mortgage payments?

No. Cap rate is calculated before financing costs. This is intentional: it allows investors to compare properties on an equal basis regardless of how each is financed. Two investors can own the same property with different mortgages, but the cap rate remains the same because it measures the property's performance, not the investor's financing structure.

How does cap rate relate to property value?

Cap rate and property value have an inverse relationship. If NOI stays constant, a lower cap rate implies a higher property value, and a higher cap rate implies a lower value. The formula can be rearranged: Property Value = NOI / (Cap Rate / 100). This is how appraisers and investors estimate property values based on income.