How to use the cap rate calculator
The Cap rate tab builds NOI and compares it with a price:
- Enter the price, or the current value if you already own the property.
- Enter gross potential rent per year: every unit let for all 12 months at market rent. Add other income such as parking or laundry.
- Enter vacancy and credit loss as a percentage of income.
- Enter operating expenses, either as one total or itemized. Include management even if you do it yourself, because the next buyer will.
The Value from cap rate tab works in reverse. Enter NOI and the cap rate comparable properties are selling at, and it estimates the value, with a table of values at cap rates from 4% to 10%.
The formulas
NOI = EGI − Operating expenses
Cap rate = NOI ÷ Price
Value = NOI ÷ Cap rateOperating expenses are the costs of running the property: tax, insurance, repairs, management, utilities and similar. They exclude mortgage payments, depreciation, income tax and major capital improvements.
A worked example
A small apartment building is listed at $950,000. Its units would rent for $96,000 a year fully occupied, and it earns $3,000 of other income. Vacancy of 5% costs $4,950.00, leaving effective gross income of $94,050.00.
Operating expenses total $38,000.00, an expense ratio of 40.4%. NOI is $56,050.00, and the cap rate is 5.90%.
On the second tab, a building with $60,000 of NOI in a market where similar buildings trade at a 6.5% cap rate is worth about $923,077.
What counts in NOI
NOI is the income the property itself produces. Two kinds of cost are left out:
- Financing. Mortgage payments depend on the buyer, not on the building, so they are excluded. That is what makes cap rates comparable across properties.
- Non-cash and owner-level items. Depreciation is an accounting deduction, not a cash cost, and income tax depends on the owner’s situation.
Large one-off capital improvements, such as a new roof, are also usually kept out of operating expenses, though many investors include a yearly replacement reserve so that NOI does not overstate what the property can sustain.
Getting expenses right matters more than it seems, because errors are multiplied by the price. If a seller’s figures leave out management and understate repairs, NOI in the example rises from $56,050.00 to $67,550.00. At a market cap rate of 6.5%, every $1,000 of overstated NOI adds $15,385 to the value, so the gap would justify paying well over $150,000 more for exactly the same building.
Cap rates move inversely to value
Because value is NOI divided by the cap rate, the two move in opposite directions. When buyers accept a lower cap rate, usually because interest rates fall or a market becomes more sought after, the same income is worth more. When cap rates rise, values fall even if the rent does not change.
| Market cap rate | Value of $60,000 NOI |
|---|---|
| 5.5% | $1,090,909 |
| 6.5% | $923,077 |
| 7.5% | $800,000 |
A one-point move in either direction changes the value by well over $100,000 in this example. The effect is larger at low cap rates: the same half-point change matters more at 4% than at 9%. This is why rising interest rates can push down property values while rents are still growing.
Cap rate, yield and cash-on-cash
The cap rate is close to the net rental yield: both are income after operating costs divided by price, before financing. Neither tells you what you earn on your own cash once a mortgage is involved. For that, the rental property calculator subtracts loan payments and shows cash flow, cash-on-cash return and the return over the whole holding period, while the DSCR calculator shows how comfortably NOI covers the loan.
What this calculator does not include
The cap rate is a one-year snapshot. It assumes the NOI you enter is stable, and says nothing about rent growth, upcoming repairs, lease expiries or the cost of financing. Use it to compare properties and check a price against the market, and a full projection or an IRR to judge the investment over time.