Ready to run the numbers?
Open the Cap Rate Calculator →Inputs
- Gross Annual Rent. 12 months of market rent at full occupancy.
- Vacancy %. Realistic vacancy assumption — typically 5–10%.
- Operating Expenses. All recurring costs except debt service.
- Purchase Price or Value. Acquisition cost or current market value.
Outputs
- NOI. Effective gross income minus operating expenses.
- Cap Rate. NOI divided by property value, expressed as a percentage.
- Investment Score. Combined deal grade accounting for cap rate and risk.
Formulas
- NOI
(Gross Rent × (1 − Vacancy%)) − Operating Expenses
- Cap Rate
NOI ÷ Property Value
Best Practices
- Compare cap rates only within the same submarket and asset class.
- Always normalize operating expense ratio (usually 35–50% of EGI) to validate your assumption.
Common Pitfalls
- Using seller's pro-forma cap rate — almost always optimistic on rent or under on expenses.
- Comparing single-family cap rates to commercial cap rates.
Advertisement
Frequently Asked Questions
- What's a good cap rate?
- Most U.S. residential markets trade between 5–9% cap. Lower in growth markets, higher in cash-flow markets.
- Why does cap rate ignore financing?
- So properties can be compared on their merits, regardless of who's buying them or with what loan.
Advertisement