Cap Rate Calculator

Capitalization rate, or cap rate, is the core metric investors use to compare the profitability of income-producing real estate. It expresses a property's net operating income relative to its current market value, so a higher cap rate normally signals a higher return (and potentially more risk) while a lower cap rate implies stronger price support.

This calculator isolates the cash flow in the form of net operating income and adjusts it for recurring capital expenses before dividing by the asset's market price. You can use it to estimate yield across apartment buildings, retail, industrial, or office assets.

Realistic example: A two-building office complex generates $96,000 in annual net operating income, and annual capital expenses total $12,000 for roof, HVAC, and common-area upgrades. The current market valuation is $1,200,000. The adjusted cap rate is 7.0%, giving investors a quick sense of return before financing costs.

How This Formula Works

Step 1 subtracts recurring capital expenses from the annual net operating income, yielding the adjusted NOI that truly reflects the cash flow available to investors. Step 2 divides the adjusted NOI by the current market value, and step 3 multiplies the ratio by 100 to express it as a percentage. Because the property value is the denominator, accurate valuations lead to more meaningful cap rates.

Cap rate is most useful when comparing similar asset classes in the same submarket. A 7% cap rate on a stabilized suburban multifamily parcel might be attractive, while the same cap rate on a newly constructed urban office may suggest valuation risk; context matters.

When reporting the result, note that the cap rate ignores debt service, so it is ideal for evaluating properties on an all-cash basis or for benchmarking before layering financing scenarios.