Calculator
Cap Rate Calculator: Capitalization Rate and Value
The capitalization rate (cap rate) is a property's net operating income divided by its purchase price or value. A $1,000,000 property with $60,000 of NOI trades at a 6.0% cap rate. Investors use cap rates to compare unlevered yield across properties and to value income property.
Formula
How underwriters use it
Cap rates express the market's required unlevered return for a property. Lower cap rates mean higher prices relative to income, usually because the market sees the income as safer or growing faster.
Always check what NOI the cap rate is built on. A broker's cap rate on pro forma NOI is not comparable to one on trailing actual NOI, and underwriters typically reprice to in-place income before comparing to market cap rates.
Frequently asked questions
Is a higher cap rate better?
A higher cap rate means more income per dollar of price, which is better for a buyer's yield but usually signals more risk, weaker location, older property or shorter leases. A lower cap rate means a higher price relative to income. Neither is better in isolation; it depends on risk and growth.
What is the difference between cap rate and ROI?
Cap rate is an unlevered, one-year yield on value that ignores financing and future growth. ROI measures and IRR capture leverage, cash flow over the hold and the sale proceeds, so they can be much higher or lower than the cap rate.
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