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The cap rate formula
Cap rate = NOI ÷ property value. NOI (net operating income) is annual rent and other income minus vacancy and operating expenses — taxes, insurance, maintenance, management — but not mortgage payments or depreciation. Because it ignores financing, cap rate lets you compare properties on equal terms.
The same formula rearranges to value = NOI ÷ cap rate (how appraisers value income property) and NOI = value × cap rate (what income a price requires).
Example
A property with $18,000 NOI priced at $250,000 has a 7.2% cap rate. At a market cap rate of 6%, the same NOI implies a value of $300,000.
FAQ
What is a good cap rate?
It depends on market and risk; many residential markets trade around 4–10%. Higher cap rates usually mean higher risk or lower-growth areas.
Does cap rate include the mortgage?
No. Cap rate is unlevered; use cash-on-cash return to include financing.
How do I estimate NOI?
Take annual rent, subtract vacancy and all operating expenses. The main rental cash flow calculator computes it for you.
Why does value rise when cap rates fall?
Value = NOI ÷ cap rate, so a lower cap rate divides the same income by a smaller number.