The capitalization rate, or cap rate, compares the income a property produces with its price. Investors use it to compare properties quickly, without worrying about how each one is financed.
Updated 25 October 2026.
The cap rate formula
How to find NOI
Operating expenses include property taxes, insurance, repairs and maintenance, property management and utilities you pay. Do not include your mortgage payment, depreciation or income taxes.
Worked example
- Rent of $2,000 per month is $24,000 per year.
- A 5% vacancy allowance is $1,200, so effective income is $22,800.
- Expenses: taxes $3,000, insurance $1,200, maintenance $1,800 and management at 8% of income $1,824, for a total of $7,824.
- NOI = $22,800 – $7,824 = $14,976.
- With a $220,000 price, the cap rate is $14,976 / $220,000 = 6.81%.
You can also work backward. If similar properties sell at a 7% cap rate, this NOI suggests a value near $14,976 / 0.07 = $213,943.
What cap rate does and does not tell you
- It compares properties without the effect of the loan, so it is a quick screening tool.
- A higher cap rate often means higher risk or a weaker location, and a lower one often means a safer, pricier market. Neither is automatically better.
- It ignores financing, so it does not show your return on the cash you invest. For that, use cash-on-cash return. To check whether the rent covers the loan, see how to calculate DSCR.
Common mistakes
- Counting the mortgage as an expense.
- Using the seller’s numbers without checking taxes and insurance.
- Leaving out vacancy and repairs.
- Comparing cap rates across very different property types.
Compare three properties by cap rate
| Property | Price | NOI | Cap rate |
|---|---|---|---|
| A | $220,000 | $14,976 | 6.81% |
| B | $300,000 | $18,000 | 6.00% |
| C | $150,000 | $12,000 | 8.00% |
Property C has the highest cap rate, but a higher number is not automatically better. It can point to an older building, a weaker area or heavier repairs. Property B has the lowest cap rate, which often signals a stronger location or lower risk, but you pay more for each dollar of income.
How to calculate cap rate in Excel
- Put gross annual rent in B1, the vacancy rate in B2 (for example 0.05), yearly operating expenses in B3 and the price in B4.
- In B5 calculate NOI with
=B1*(1-B2)-B3. - In B6 calculate the cap rate with
=B5/B4and format the cell as a percentage.
Change the vacancy or expenses and watch B6 move. If you track several rentals, the Landlord Rental Property Tracker for Excel keeps rent, expenses and NOI for each property in one file.
See how small changes move the cap rate
If expenses in the main example rise by $1,000, NOI falls to $13,976 and the cap rate drops from 6.81% to 6.35%. At a 7% cap rate, each $1,000 of NOI is worth about $14,286 of value ($1,000 / 0.07). That is why you should check taxes, insurance and repairs before you make an offer.
Which expenses to include
Use real bills for property taxes and insurance, and realistic allowances for repairs, vacancy and management, even if you plan to manage the property yourself. For the general categories of rental income and expenses, see IRS Publication 527, Residential Rental Property. Tax rules and investor underwriting are not the same thing, so use it as a reference for categories, not as a NOI formula.
When cap rate is the wrong tool
- It ignores financing, so it does not show your return on cash. Use cash-on-cash return for that.
- It assumes the income stays the same, which is weak for a property you plan to renovate. Look at BRRRR returns instead.
- Short-term rentals vary more by season. See how to calculate Airbnb profit.
Try it
Use the cap rate calculator to enter your own income and expenses. You can find the rest of our investor tools on the free tools page.
This is general information, not financial, tax or lending advice. Figures are worked examples. Check your own numbers with a lender or tax professional.
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Frequently asked questions
What is a good cap rate?
There is no single good number. It depends on the market, the property type and your risk tolerance, so compare a property with similar ones nearby.
Does cap rate include the mortgage?
No. Cap rate uses net operating income, which excludes loan payments, so it looks the same whether you pay cash or borrow.
What is the difference between cap rate and cash-on-cash return?
Cap rate measures the property’s income against its price. Cash-on-cash return measures your annual cash flow against the cash you actually put in, after the loan payment.