Cap Rate Calculator
Work out a property's cap rate from net operating income and price, the value at a target cap rate, cash on cash return and price per square foot. Pick what you want to work out and type the numbers from the listing.
Your numbers
Income after vacancy and operating expenses, before the mortgage, depreciation and income tax.
Cap rate
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- Net operating income
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An estimate from the numbers you typed, for screening a deal. It is not an appraisal or investment advice.
The calculation runs in your browser and ParrotNotes does not store your numbers. They sit in the page address so you can bookmark or share the result.
What cap rate tells you, and what it does not
The capitalization rate is a property's net operating income for a year divided by its price or value. It is a quick yield figure: what the building would earn on the price if you paid cash, over one year.
Because NOI is worked out before the mortgage, cap rate leaves the loan out. That is what makes it useful for comparing buildings, since two buyers with different financing see the same cap rate, and it is also its limit: it says nothing about what your own cash earns once the loan is paid. It is a one-year snapshot too, so it does not show rent growth, a lease rolling over next year, big repairs coming or what you sell for at the end.
How NOI is worked out
Start with the rent and other income (parking, laundry, storage) for a year. Take off vacancy and credit loss, then the costs of running the property: property taxes, insurance, repairs and maintenance, management, and any utilities the owner pays.
Say the rent roll is $120,000 a year, you allow 5% for vacancy ($6,000) and operating expenses are $40,000. NOI is $120,000 − $6,000 − $40,000 = $74,000. At a price of $1,000,000 that is a 7.4% cap rate. The mortgage, depreciation and income tax stay out of NOI; if a seller's figures include them, take them out before you compare.
Cap rate vs cash on cash vs ROI
Cap rate is NOI ÷ price: unlevered, one year. Cash on cash is the cash flow after the loan payments divided by the cash you put in (down payment, closing costs, up-front repairs): levered, one year, pre-tax. ROI, as most investors use it, covers the whole hold, including principal paid down, appreciation and the sale.
With $74,000 of NOI, a $750,000 loan at 7% over 30 years ($59,877 a year) and $270,000 of cash in, the property has a 7.4% cap rate and a 5.2% cash on cash return. When the loan costs more than the property yields, borrowing pulls the cash on cash return below the cap rate; when it costs less, it pushes it above.
How value changes with the cap rate
Value = NOI ÷ cap rate, so value and cap rate move in opposite directions. The table below is worked out for $74,000 of NOI: half a point either way moves the value by between about $60,000 and $95,000.
| Cap rate | Value at $74,000 NOI |
|---|---|
| 6.0% | $1,233,333 |
| 6.5% | $1,138,462 |
| 7.0% | $1,057,143 |
| 7.5% | $986,667 |
| 8.0% | $925,000 |
What to ask on the tour
A cap rate is only as good as the NOI behind it. On the tour or the first call, ask for the rent roll and the lease expiry dates, what is and is not in the operating expenses (management fee, reserves, owner-paid utilities), when the roof and the HVAC were last replaced, and why the owner is selling now.
The answers come in fast, in passing, often from someone who is not in the room next time. Write them down while you walk, or record the conversation, and check the seller's NOI against them before you rely on the cap rate.
More for brokers: How commercial real estate brokers document tours and client calls, How to run a client meeting.
Remember why the seller is selling
The numbers screen the deal; the seller's reasons, the tenant history and the broker's asides are what you forget. ParrotNotes records the tour or the call and writes the summary.
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