About this calculator
Cap rate (capitalization rate) is the unlevered return on a real-estate investment — net operating income divided by purchase price. It's how commercial brokers and seasoned investors talk about value because it strips out financing decisions. A 7% cap rate means $7,000 of NOI per $100,000 of purchase price.
The formula
Cap rate = NOI / Purchase price, where NOI = Gross Rental Income × (1 − vacancy%) − operating expenses. Operating expenses include property tax, insurance, management, repairs, but not mortgage payments — that's what makes cap rate "unlevered."
What's a "good" cap rate?
- 3–5% — Trophy markets (coastal CA, NYC, Boston). Cash flow is thin; you’re betting on appreciation.
- 5–7% — Stable Class A in growing metros. Balanced cash flow + appreciation.
- 7–10% — Class B/C, secondary cities, value-add. Cash flow forward.
- 10%+ — Either deep cash-flow markets (Detroit, Cleveland) or properties with significant problems. Verify the numbers carefully.
Cap rate vs cash-on-cash
Cap rate ignores financing. Cash-on-cash includes the mortgage and measures actual cash return on your invested capital. A 6% cap rate property purchased with 25% down at 7% mortgage might produce 4% cash-on-cash; with 50% down, maybe 7%. Different metrics, both useful.
Cap rate compression
When interest rates fall, cap rates compress (fall) — buyers accept lower yields because alternative investments (bonds) yield less. The 2010s saw cap rates fall from 8% to 5% across many markets, pushing prices way up even at flat NOI. When rates rise (2022–2024), cap rates expand and prices fall. Watch the spread between cap rates and 10-year Treasury yields.