How do you calculate a cap rate?

Divide net operating income by the purchase price or value. $520,000 of NOI on an $8,000,000 price is a 6.5% cap rate.

Does a cap rate include debt?

No. NOI is before debt service, so a cap rate is an unlevered measure. To see the return with financing, use a cash-on-cash calculation.

Is a higher cap rate better?

It depends on what you are buying. A higher rate pays more income on the price, but usually signals more risk or less growth. Compare it with similar sales.

What is the difference between a cap rate and an IRR?

A cap rate is a one-year yield on price, ignoring financing and sale. An IRR is an annualized return across the whole hold, including cash flows and the sale.

Free tool and guide

Cap rate calculator and how to read one

A cap rate turns a property's income into a price, and a price into a yield. Enter NOI and price below to get the cap rate, the implied value, and how far value moves if the rate shifts.

Use the Cap rate calculator Read the guide

A cap rate, or capitalization rate, is a property's net operating income divided by its price. It is the unlevered yield in the first year, before any financing. A property with $520,000 of NOI bought for $8,000,000 has a 6.5% cap rate.

Cap rate calculator

Enter NOI and a price for the cap rate, then test what the same NOI is worth at other cap rates. It runs in your browser: your numbers are not uploaded, saved or tracked, and there is no sign-up.

Showing invented example numbers

Cap rate: 6.50%; NOI divided by price
Value at the cap rate tested: $7,428,571; NOI divided by that cap rate
Value if the cap rate rises: $7,428,571; -$571,429 against this price
Value if the cap rate falls: $8,666,667; $666,667 against this price

Arithmetic only, with no market benchmarks. This is not a loan quote or advice.

The cap rate formula

Cap rate = NOI / price. Rearranged, price = NOI / cap rate, and NOI = price x cap rate. That is all the math there is. The hard part is deciding which NOI and which rate belong in it.

You know	You want	Formula
NOI and price	Cap rate	NOI / price
NOI and cap rate	Value	NOI / cap rate
Price and cap rate	NOI	Price x cap rate

A worked example

A property earns $520,000 of NOI and is priced at $8,000,000. The cap rate is 6.50%.

Now hold NOI still and move the rate half a point. At 7%, the value falls to $7,428,571. At 6%, it rises to $8,666,667. A half-point move changes value by more than the property earns in a year, which is why cap rate assumptions carry so much of an underwriting.

What is a good cap rate?

There is no single good number, so this calculator applies no benchmark. A cap rate reflects risk and growth together. A lower rate usually means buyers accept less income today because they expect the income to be safer or to grow. A higher rate usually means they want more income to take on more risk.

So compare a cap rate only with recent sales of similar properties: same property type, quality, location and lease profile, and ideally the same NOI basis. Also compare it with your cost of debt. If the loan costs more than the cap rate, borrowing lowers your cash return until income grows.

Where cap rates mislead

The NOI may be a forecast. A "6% cap" on next year's pro forma NOI can be a much lower rate on what the property earns today. Use the offering memorandum checker to compare them.
Taxes may reset. A sale can trigger a reassessment in many places, which cuts the NOI you will actually own.
Reserves differ. Some NOI figures deduct capital reserves and some do not. Two equal cap rates can hide different numbers.
It ignores the future. A cap rate is one year. It says nothing about rollover, capital needs or the sale. That needs a multi-year view, such as an IRR and equity multiple.

Frequently asked

How do you calculate a cap rate?: Divide net operating income by the purchase price or value. $520,000 of NOI on an $8,000,000 price is a 6.5% cap rate.
Does a cap rate include debt?: No. NOI is before debt service, so a cap rate is an unlevered measure. To see the return with financing, use a cash-on-cash calculation.
Is a higher cap rate better?: It depends on what you are buying. A higher rate pays more income on the price, but usually signals more risk or less growth. Compare it with similar sales.
What is the difference between a cap rate and an IRR?: A cap rate is a one-year yield on price, ignoring financing and sale. An IRR is an annualized return across the whole hold, including cash flows and the sale.

Pacific Software Ventures built this tool and guide, and sells AI consulting and training to commercial real estate firms. This is general education, not investment, legal or tax advice.

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