Calculate capitalization rate from NOI and property value, or back-solve property value from your target cap rate and net operating income.
The capitalization rate, or cap rate, is one of the most widely used metrics in real estate investing. It measures the rate of return on a property based on its net operating income (NOI) relative to its current market value or purchase price. By distilling a property's income potential into a single percentage, the cap rate provides a quick way to compare investment opportunities across different markets and property types.
This calculator computes the cap rate from your property's NOI and value, and also back-solves the implied property value when you input a target cap rate. This dual functionality helps both buyers evaluating deals and sellers pricing their properties. A higher cap rate generally indicates higher potential returns but also higher risk, while lower cap rates suggest more stable, lower-risk properties in premium locations.
Understanding cap rates is essential for any serious real estate investor. They help set expectations, benchmark deals against market averages, and quickly filter opportunities worth deeper analysis.
Cap rate is the common language of real estate investing. When an agent says a property is listed at a "6 cap," experienced investors immediately understand the income-to-price relationship. This calculator lets you instantly verify that claim, compare it to local benchmarks, and reverse-engineer what a property should be worth given its income stream and your target return.
Cap Rate = (Net Operating Income / Property Value) × 100 Property Value (back-solve) = Net Operating Income / (Target Cap Rate / 100)
Result: Cap Rate = 8.00%
A property generating $48,000 in annual NOI with a market value of $600,000 has a cap rate of 8.00%. If your target cap rate is 7%, the implied value would be $685,714, suggesting the property is priced attractively. If your target is 9%, the implied value drops to $533,333, meaning you'd need to negotiate.
Cap rate is a snapshot metric — it tells you the yield at the current price and income level but says nothing about future rent growth, appreciation potential, or tax benefits. A 5% cap rate in a rapidly growing market may outperform a 9% cap rate in a declining one when you account for value appreciation and rent increases over 5–10 years.
National average cap rates for multifamily properties have ranged from 4.5% to 7.5% over the past decade, compressing during low-interest-rate environments and expanding when rates rise. Tracking your local market's cap rate trend helps you identify whether deals are getting richer or leaner.
Many investors back-solve from a target cap rate to determine their maximum offer. If a market trades at 6.5% and you want a slight discount, target 7% and calculate the value. This discipline prevents emotional overbidding and ensures every deal meets your return threshold before you even tour the property.
There's no universal answer. In hot markets like San Francisco or New York, 3–5% cap rates are common. In smaller cities, 7–10% is typical. A "good" cap rate depends on your risk tolerance, financing costs, and the property's growth potential. Generally, a cap rate above your cost of capital is desirable.
Cap rate measures unlevered return, treating the property as if purchased in all cash. Cash-on-cash return factors in financing and only measures the return on the actual cash you invested. A property with a 6% cap rate could yield 10–12% cash-on-cash with favorable leverage.
No. Cap rate uses NOI, which excludes debt service (mortgage payments). This makes cap rate useful for comparing properties regardless of how they're financed. Debt is accounted for in metrics like cash-on-cash return and DSCR.
Technically yes, if operating expenses exceed gross income, producing a negative NOI. This signals the property is losing money operationally. Negative cap rates are rare and usually indicate vacancy issues, mismanagement, or a property in transition (renovation, lease-up).
Rising interest rates tend to push cap rates higher because investors demand greater returns to compensate for more expensive financing. This can cause existing property values to decline even if income remains steady. The relationship isn't instant but unfolds over 6–18 months as deals reprice.
Use market value for evaluating your current portfolio and comparing to benchmarks. Use purchase price (or your offer price) when analyzing prospective deals to see what return you'd lock in. Both perspectives are valuable and should be tracked separately.