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The building earns $26,220 a year before any loan, which is 6.2% of the $425,000 price.

From rent to net operating income

per year

Gross rent$45,600

Vacancy−$2,280

Operating costs−$17,100

NOI$26,220

The math, with your numbers

Gross rent$45,600Monthly rent × 12$3,800 × 12

NOI$26,220Gross rent − vacancy − operating costs$45,600 − $2,280 − $17,100

Cap rate6.2%NOI ÷ price$26,220 ÷ $425,000

Price at a 5% cap$524,400NOI ÷ 0.05$26,220 ÷ 0.05Same income, lower cap rate, higher price.

Cap rate leaves out the loan on purpose. It describes the building, not your deal.

How this calculator works

Cap Rate = Net Operating Income ÷ Purchase Price. NOI is what the property earns after operating expenses and vacancy, before any loan payment. On the $425,000 duplex used across this site: $3,800 a month in rent is $45,600 a year, 5% vacancy takes $2,280, and $17,100 of operating expenses leaves $26,220 of NOI. $26,220 ÷ $425,000 = 6.2%.

The input people get wrong is NOI, because four costs they expect to see in it are excluded by convention: mortgage principal and interest, depreciation, capital expenditures like a roof or a furnace, and income taxes. Leaving debt out is deliberate. Cap rate measures the building, not the deal, so a cash buyer and a buyer borrowing 80% compute the same cap rate on the same property.

Key insights

Cap rate and price move against each other on the same income. Holding NOI at $26,220, a 6.2% cap prices the duplex at $425,000 and a 5.0% cap prices it at $524,400. That arithmetic is why a listing quotes the lowest cap rate it can defend.

Cap rate cannot tell you whether a deal cash flows, because it ignores the loan. A 6.2% cap against a 7% mortgage rate is negative leverage: the debt costs more than the property earns, so every additional dollar borrowed lowers the return on your own cash.

An advertised cap rate is usually computed on pro forma income, meaning the rent the seller believes the property could achieve. Recomputing it on the trailing twelve months of collected rent is where most of the gap between an asking cap rate and a real one appears.

Benchmark ranges shift by asset class, market, and year, so a figure hardcoded on a calculator page would be wrong within a quarter. The published surveys from CBRE and Marcus & Millichap are where the current spread lives.

Frequently asked questions

What is the cap rate formula?›

Cap Rate = Net Operating Income ÷ Purchase Price. On a $425,000 duplex producing $26,220 of NOI, that is $26,220 ÷ $425,000 = 6.2%. Both inputs are annual, and NOI is taken before any mortgage payment.

Is a higher cap rate better?›

A higher cap rate means more income per dollar of price, and it usually also means more risk: an older building, a weaker submarket, or shorter leases. The same 8% that looks generous on a spreadsheet is the market pricing something it does not like. Cap rate is a price signal as much as a return.

Does cap rate include the mortgage?›

No. NOI is calculated before debt service, so cap rate is identical whether the property is bought with cash or financed. Cash-on-cash return is the metric that accounts for the loan.

What does cap rate leave out?›

Financing, capital expenditures, depreciation, and income taxes. A building can show 6.2% and still consume several years of that yield on one roof replacement, because capital spending never touches NOI.

How do I calculate cap rate from monthly rent?›

Annualize the rent, subtract vacancy and operating expenses to reach NOI, then divide by price. $3,800 a month is $45,600 a year; less $2,280 of vacancy at 5% and $17,100 of expenses, NOI is $26,220. Dividing monthly rent by price instead produces a number that is not a cap rate.

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