Cap rate calculator

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Cap rate on this property
6.04%

$25,368 of net income on a $420,000 price

Net income$25,368
A month$2,114
Gross yield8.86%
$224k$448k$672k$896k3%5%7%9%12%6.04%: $420k$224k$448k$672k$896k3%6%9%12%6.04%: $420k

What this income is worth at each cap rate. A building is priced by dividing its income by the rate the market wants, so this curve is the valuation and your price sits on it.

A property at $420,000 renting for $3,100 a month grosses $37,200 a year. After 6.0% vacancy and $9,600 of running costs the net operating income is $25,368, so the cap rate is 6.04% - against a gross yield of 8.86%, which is the figure listings quote and nobody can buy at.

How to use this, and the parts people get wrong
  • NOI is the yearly rent minus running costs - upkeep, tax, insurance, vacancy - before any mortgage.
  • Cap rate ignores financing on purpose, so buildings can be compared regardless of how they are bought.
  • Run it both ways: the rate a price implies, and the price a required rate implies. Disagreement with the asking price is the finding.

From gross rent to real income

The listing yield on this property is 8.86%. Once vacancy and running costs come off, the cap rate is 6.04% - $11,832 a year of the rent never reaches you.

6.04%cap rate on the price paid
$25,368of net operating income a year
$2,114a month, before any mortgage

The same income at every rate

What a buyer demanding each rate would pay for this income.

Cap rateWorthVs your priceChange
3%$845,600+$425,600+101%
4%$634,200+$214,200+51%
5%$507,360+$87,360+21%
6%$422,800+$2,800+1%
7%$362,400$-57,600-14%
8%$317,100$-102,900-24%
9%$281,867$-138,133-33%
10%$253,680$-166,320-40%
12%$211,400$-208,600-50%

Questions people ask

How do I calculate a cap rate?
Net operating income divided by the price. Here $37,200 of rent a year, less 6.0% vacancy and $9,600 of running costs, is $25,368 of net income on a $420,000 price - a cap rate of 6.04%.
Does the mortgage go into a cap rate?
No, and that is the point rather than an oversight. A cap rate describes the asset, not the deal, so two buildings bought with different financing can be compared on it. Interest belongs in a cash-on-cash return, which is a different measurement of a different thing.
What counts as an operating cost?
What the building costs to run whether or not you borrowed to buy it: management, maintenance, insurance, property taxes, utilities you pay, and a realistic repairs allowance. Not the mortgage, and not capital works that add value rather than maintain it.
Is a higher cap rate better?
It is a higher yield, which usually means a higher risk: weaker tenants, a softer location, or a shorter lease. A prime building in a strong city trades at a low cap rate precisely because its income is trusted. The rate prices the income, so read it as a price rather than a score.
Why does the value swing so much with the rate?
Because value is income divided by the rate, so the same income is worth $317,100 at 8% and $507,360 at 5%. That division is why a small move in what the market demands moves prices so far, and it is the whole shape of the chart on this page.

Method and sources

  • Standard income-capitalisation arithmeticNet operating income over price, and its inverse
The calculation

Gross rent is the monthly rent times twelve. Vacancy comes off as a percentage of that, then the running costs you supply, leaving net operating income. The cap rate is that income over the price. The chart inverts the same line - income divided by a rate gives a value - which is how a building is priced from its income in practice.

What these figures do not cover
  • No financing. A cap rate is unlevered by definition; a mortgage belongs in a cash-on-cash return instead.
  • No capital expenditure. Roofs and boilers are not operating costs but they are real, and a cap rate flatters a building that needs one.
  • Rent is treated as level for the year, and vacancy as a flat percentage rather than as actual void periods.
  • Property taxes, transfer duties and depreciation rules are national and sit inside the cost figure you supply.

Last updated August 2026.

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