Landlord Calculator

Cap Rate Calculator

Measure a rental property's return independent of how it's financed. The capitalization rate lets you compare deals apples-to-apples, whether you pay cash or borrow.

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Opens live in the Rental Flow app, no account needed.

What this calculator does

The cap rate (capitalization rate) is the property's annual net operating income expressed as a percentage of its purchase price. Because it ignores financing, it answers a clean question: if you bought this property with cash, what return would the operations alone produce? That makes it the standard yardstick for comparing one rental against another.

The formula

Cap rate = Net Operating Income ÷ Purchase Price

Net operating income (NOI) is your annual rental income minus annual operating expenses, including taxes, insurance, maintenance, management, and the like. It does not subtract mortgage payments; that's what keeps cap rate financing-neutral.

Worked example

$250,000 property, $24,000 income, $8,400 expenses

Purchase price$250,000
Annual rental income$24,000
Annual operating expenses$8,400
Net operating income$15,600
Cap rate6.24%

A "good" cap rate depends entirely on your market. 4% might be strong in an expensive coastal city and weak in a cheaper one. Use it to rank properties you're considering in the same area, not as a universal pass/fail.

What is a good cap rate?

There is no single right answer, because cap rate is a trade-off between return and risk. As a rough guide, many residential rentals trade in the 4% to 10% range. Lower cap rates (4% to 5%) usually mean a safer, more expensive market with steady appreciation, such as a major coastal city. Higher cap rates (8% to 10%+) usually mean a cheaper market or a property with more risk, more management, or less appreciation potential.

The key is to compare like with like. A 6% cap rate is only meaningful next to other 6% deals in the same area and property class. Use cap rate to rank the deals in front of you, then weigh the qualitative factors the number cannot capture: neighborhood trajectory, tenant quality, deferred maintenance, and how much of your time the property will demand.

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Frequently asked questions

No. Cap rate is calculated on net operating income, which subtracts operating expenses but not loan payments. That is deliberate: leaving out financing lets you compare two properties on their operations alone, regardless of how each is paid for. If you want a return figure that does account for your loan, use cash-on-cash return instead.
Cap rate measures a property's annual operating return as a percentage of its purchase price, ignoring financing and appreciation. Total ROI is broader: it combines cash flow, loan paydown, and appreciation into one return on the actual cash you invested. Cap rate is best for quickly comparing deals; ROI is best for projecting your full return over a holding period.
Not necessarily. A high cap rate often signals higher risk, a softer market, or a property that needs more work or active management. A lower cap rate can reflect a safer, appreciating market where you accept a smaller operating return in exchange for stability. Match the cap rate to your goals rather than chasing the biggest number.
Start with your annual gross rental income, then subtract annual operating expenses such as property taxes, insurance, maintenance, property management, utilities you pay, and a vacancy allowance. Do not subtract mortgage principal and interest, depreciation, or capital improvements. The result is your net operating income (NOI), which is the top of the cap rate formula.