The formula
Cap rate = annual NOI ÷ price
NOI is gross rental income, minus a vacancy allowance, minus all operating expenses — but not mortgage payments, depreciation, or capital expenditures. This calculator builds NOI from your rent, other income, vacancy percentage, and monthly operating expenses.
What cap rates tell you
- Comparing deals. Two similar properties, one at a 5% cap and one at 7% — the second produces more income per dollar, so either it’s cheaper for a reason or it’s a better buy.
- Valuing a property. If comparable buildings trade at a 6.5% cap and this one produces $39,000 NOI, the implied value is about $600,000.
- Reading a market. Falling cap rates mean prices are outrunning rents — common late in a cycle. Rising cap rates mean the opposite.
Typical ranges (rough, and always shifting)
| Market type | Cap rate |
|---|---|
| Prime coastal metro, class A | 3.5%–5% |
| Large metro, class B | 5%–6.5% |
| Secondary market, class B/C | 6.5%–8.5% |
| Tertiary market or heavy value-add | 8.5%+ |
Cap rate’s blind spots
It’s a snapshot. It says nothing about rent-growth potential, deferred maintenance, lease quality, or your financing. Use it to filter and to value — then run the full rental ROI analysis on the survivors.