Cap rate calculator

Common questions

How do you calculate cap rate?

Cap rate is net operating income divided by the property value or purchase price, expressed as a percentage. A property with $450,000 of NOI bought for $6,000,000 has a 7.5% cap rate.

What is a good cap rate?

It depends entirely on the market, the asset class and the risk. A stabilised multifamily building in a major metro might trade at 4–5%, while secondary-market industrial or a property with rollover risk might be 7–9%. A higher cap rate is not automatically a better deal — it usually means the market is pricing in more risk.

Does cap rate include the mortgage?

No. Cap rate is calculated on net operating income, which is before debt service. Two identical buildings have the same cap rate whether one is bought with cash and the other with 70% leverage. Financing affects your cash-on-cash return, not the cap rate.

How do you find value from a cap rate?

Divide NOI by the cap rate as a decimal. $450,000 of NOI at a 6.5% cap rate implies a value of about $6,923,000. This is how most income-property valuation is done.

What is the difference between going-in and exit cap rate?

The going-in cap rate uses the NOI at acquisition. The exit or terminal cap rate is what you assume the property trades at when you sell, and it usually gets a modest premium to account for the asset being older. Small changes to the exit cap rate move returns more than almost any other assumption.