Calculating your cap rate gives you a quick snapshot of a property’s return potential. With a reliable cap rate calculator, you can benchmark deals, compare markets, and spot opportunities fast. In this guide you’ll learn how to define cap rate, gather the numbers you need, run the math manually, then speed up analysis using Rentastic tools. By the end you’ll know how to interpret results, refine inputs, and integrate cap rate into a broader investment strategy.
Define cap rate
What is cap rate?
The capitalization rate, or cap rate, is the ratio of a property’s annual net operating income (NOI) to its current market value. In formula form:
Cap Rate = Net Operating Income ÷ Current Market Value
For example, a property generating $70,000 in NOI on a $1,000,000 valuation has a 7 percent cap rate (Rentastic Support). You’ll often see cap rate expressed as a percentage, so multiply the result by 100 when you calculate manually.
Why cap rate matters
Cap rate helps you compare deals in different locations or asset types by normalizing returns. A higher cap rate generally signals stronger cash returns but often comes with higher risk. A lower cap rate may mean safer markets or pricier neighborhoods, but with thinner income cushions. Use cap rate alongside other metrics—like cash-on-cash return or internal rate of return—to build a full picture of risk and reward.
Gather required data
Calculate net operating income
To find NOI, subtract operating expenses from gross rental income. Operating expenses include property management fees, maintenance, insurance, utilities, and vacancy allowances. Do not deduct mortgage payments, income taxes, or major capital expenditures. For example:
NOI = ($100,000 – $5,000) – ($15,000 + $8,000) = $72,000
Determine market value
Current market value is the price you could sell the property for today. You can use recent sales comparables, an appraisal, or the listing price on similar assets in the same area. If you’re analyzing a prospective purchase, use the expected purchase price.
Compute cap rate manually
Cap rate formula
Once you have NOI and market value, plug them into the formula:
Cap Rate = NOI ÷ Market Value × 100
If your property has $72,000 in NOI and a $900,000 market value:
Cap Rate = 72,000 ÷ 900,000 × 100 = 8 percent
Calculation example
Imagine you’re evaluating two duplexes:
Duplex A offers a higher cap rate, but you’ll also weigh location, tenant quality, and financing terms before making a decision.
Use Rentastic cap rate calculator
Access the calculator
Rentastic’s cap rate calculator automates these steps, letting you test scenarios in seconds. You just need to log in, open the tool, and prepare your numbers.
Enter your numbers
You can adjust rents or expenses to model renovations, rent increases, or cost reductions. This “what-if” flexibility helps you optimize before you invest.
Analyze your results
The tool displays your cap rate alongside benchmarks for your region or asset class. If your rate falls below local averages, you can drill into line items—maybe your maintenance costs are too high, or your rent assumptions too conservative. You’ll also see how small changes ripple through your return profile.
Benchmark cap rate comparisons
Compare regional rates
Cap rates vary by location—urban core multifamily often yields lower rates (3 %–5 %), while secondary markets or niche assets can run 7 %–10 % or higher. Always benchmark your result against metro-level averages to assess risk appetite and market dynamics.
Monthly income benchmarks
In practical terms, monthly income per unit can hint at cap rate performance. Typical ranges include:
These figures give you a quick sense of whether your rents and expenses are aligned with solid cap rate targets (Rentastic Support).
Evaluate property types
Different asset classes carry distinct cap rate norms:
Always align your target cap rate with property type, tenant profile, and economic trends.
Improve your cap rates
Increase net income
Trim expenses
Explore financing
While cap rate assumes an all-cash purchase, your real cost of capital affects real returns. Lower interest rates and favorable loan terms don’t change cap rate but boost cash-on-cash returns. Compare financing scenarios side by side with cap rate calculator and Rentastic’s deal analyzer.
Understand cap rate limits
Excluded costs
Cap rate does not factor in financing costs, taxes, major capital expenditures, or broker fees. It’s a snapshot of unlevered return. Before you sign a contract, clarify all closing costs and projected capital needs.
Complementary metrics
Pair cap rate with other measures for a fuller view:
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