Why does the mortgage not count?

Because it describes the buyer rather than the building. Cap rate is meant to compare properties, so anything that depends on how the purchase was financed is left out.

Is a higher cap rate better?

It means more income per unit of price, which usually also means more risk. Prime assets in strong locations trade at low cap rates precisely because the income is dependable.

Investmentreal estateUnited States only

Cap Rate Calculator

Capitalisation rate from net operating income. Financing is deliberately excluded, which is what makes cap rate comparable between two buyers with different mortgages.

Also called: capitalization rate, noi calculator.

Capitalisation rate

7.5%

7.5% on net operating income of $30,000.00. At that cap rate the property is being valued at 13.33 years of net income.

Net operating income

$30,000.00

Expenses as a share of income

37.5%

Years of net income the price represents

13.33

What it would be worth at a 6% cap rate

$500,000.00

At an 8% cap rate

$375,000.00

How this is calculated

An estimate, not an offer or a guarantee. Projected returns assume the rate you entered holds for the whole term, which no market does.

Method and background

This is what the calculation gives for the numbers you entered. It is an estimate, not advice, and it knows nothing about your situation beyond those numbers. Rules for United States change on a published schedule; the effective date is shown on every rule-based tool.

How this is calculated

Net operating income is gross rent less every operating expense, and specifically not less the mortgage. Excluding financing is the whole point: it describes the property rather than the buyer, so two investors with different loans can compare the same asset. Dividing by the price gives the cap rate, and inverting it gives the multiple of net income the market is paying, which is often the more intuitive way to see whether a price is sensible.

cap rate = net operating income / value; NOI = gross income - operating expenses

NOI: Net operating income (currency)
V: Property value (currency)

Worked examples

Each of these is asserted on every build. If a change to the engine ever moved one of these answers, the build would fail before the page could print it.

a seven and a half percent cap rate

Purchase price or market value: $400,000.00
Gross annual rental income: $48,000.00
Annual operating expenses: $18,000.00

Capitalisation rate7.5%

30,000 over 400,000, worked by hand

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expenses equal to income leaves nothing

Purchase price or market value: $400,000.00
Gross annual rental income: $48,000.00
Annual operating expenses: $48,000.00

Capitalisation rate0%

boundary

Open this example

Method and limits

What it assumes

Operating expenses exclude debt service, capital improvements and income tax.

What it deliberately does not model

It is a single-year snapshot and says nothing about growth or lease expiry.
A low cap rate can mean an expensive property or a safe one, and this cannot distinguish them.

Formula version 1.0.0 · definition 1.0.0 · United States · Report a problem with this calculator

Frequently asked questions

Why does the mortgage not count?: Because it describes the buyer rather than the building. Cap rate is meant to compare properties, so anything that depends on how the purchase was financed is left out.
Is a higher cap rate better?: It means more income per unit of price, which usually also means more risk. Prime assets in strong locations trade at low cap rates precisely because the income is dependable.