Article — Cap Rate Calculator
Cap Rate Calculator: How to Value Income Property in 2026
A capitalization rate divides a property's annual net operating income by its value. A duplex producing $30,000 of NOI on a $500,000 purchase price is a 6.0% cap rate property. Commercial cap rates across major U.S. metros ran between 5.5% and 8.5% through 2026, with Class A multifamily compressing toward 4 to 5% and secondary-market office reaching 9% or higher.
The math is simple, but the interpretation is the point. A cap rate is the unlevered annual yield an asset would produce if you paid cash. It strips out financing, depreciation, and income tax to make properties comparable on the same income basis. Two buildings with the same NOI and the same cap rate are worth the same price, regardless of how each buyer finances the deal.
What is a cap rate?
The capitalization rate is the ratio of net operating income to property value, expressed as a percentage. It answers a direct question: if you owned this building free and clear, what annual yield would the income stream produce on the price you paid?
NOI is gross income minus operating expenses. Operating expenses include property taxes, insurance, maintenance, management fees, landlord-paid utilities, HOA dues, and a reserve for vacancy. They do not include mortgage payments, capital improvements, or income tax. The exclusion of debt service is deliberate. By stripping out financing, the cap rate lets investors compare a Manhattan office tower bought with 30% leverage against a single-family rental bought with cash.
The cap rate is mathematically identical to the inverse of the price-to-earnings multiple used in stock investing. A 5% cap rate is a 20x earnings multiple. A 10% cap rate is a 10x multiple. The two industries developed the same math separately and use opposite conventions.
The cap rate formula
Cap rate equals NOI divided by property value, multiplied by 100. Rearranged, the same identity solves for the other two variables. Divide NOI by a target cap rate to get the maximum price that hits your return. Multiply price by the target rate to find the NOI a property must produce to clear the hurdle.
Cap rate = NOI / Value solves the yieldValue = NOI / Cap rate solves the priceNOI = Value × Cap rate solves the incomeThe arithmetic is unforgiving, which is why pro forma assumptions matter more than the formula itself. Inflate gross rent by 5% or shrink the vacancy reserve from 7% to 3%, and the NOI moves enough to swing a deal from a 6% cap to a 7%, changing the asking price by roughly 17%.
What is a good cap rate?
A good cap rate is one that pays you fairly for the risk you are taking. Prime markets and stabilized assets trade at lower cap rates because the income is reliable. Secondary markets, older buildings, and short-tenured tenants trade at higher cap rates because the income is not.
- 4 to 5% = Class A core markets, trophy assets, lowest risk
- 5 to 7% = conservative buy-and-hold, stabilized multifamily, industrial
- 7 to 9% = moderate risk, value-add plays, secondary metros
- 9% and above = higher risk premium, tertiary markets, active management required
- 0 to 3% = land or pre-stabilization properties with little current NOI
The benchmark also moves with the cost of capital. When 10-year Treasury yields rose through the early 2020s, cap rates across most asset classes expanded by 100 to 200 basis points. A 5% cap rate was a screaming deal in 2021 and a fair market clearing price by 2024.
Cap rate by property type
Different property types attract different buyer pools with different return expectations. Stabilized multifamily and industrial assets sit at the low end. Hospitality and office, where lease terms are shorter and income volatility is higher, sit at the higher end.
Industrial and warehouse cap rates compressed sharply through the e-commerce boom, then stabilized in the 5.5 to 7.5% range. Retail varies dramatically by tenant strength: a grocery-anchored center trades 100 to 150 basis points below an unanchored strip. Single-family rentals, the bread and butter of small investors, generally clear 5 to 8% depending on the city.
Brokers often quote two cap rates on the same listing. The going-in cap rate uses current NOI, which may reflect a building that is only 70% leased. The stabilized cap rate uses pro forma NOI at full occupancy. The gap can be 200 basis points or more. Ask which number you are looking at before you make an offer.
Cap rate vs. ROI and cash-on-cash
Cap rate measures the property. ROI and cash-on-cash measure your specific deal. The difference is leverage.
A $1,000,000 property with $70,000 of NOI is a 7% cap rate property. If you pay cash, your ROI is also 7%. If you finance 75% at a 6.5% mortgage, your annual debt service runs about $56,800, leaving roughly $13,200 of cash flow on $250,000 of equity. That is a 5.3% cash-on-cash return. Leverage amplifies upside when the cap rate exceeds the loan constant, and it amplifies downside when the loan constant exceeds the cap rate.
Use cap rate to compare properties on the same risk-adjusted basis. Use cash-on-cash to evaluate your own deal once you know the financing terms. Mixing the two leads to bad investment decisions, especially when interest rates move.
Cap rates and interest rates
The spread between cap rates and the 10-year Treasury yield has historically averaged 250 to 400 basis points. When the Federal Reserve raised rates aggressively in 2022 and 2023, that spread compressed because cap rates moved up more slowly than Treasury yields. Experienced investors use Treasury yields as a leading indicator for cap rate movement.
Common cap rate mistakes
The formula is easy. The inputs are where deals go wrong.
- Inflating rent. Using asking rent instead of in-place rent, or ignoring concessions, makes NOI look better than it is.
- Skipping vacancy reserve. A property is not 100% occupied 100% of the time. Subtract 5 to 10% before computing NOI.
- Forgetting capex. Cap rate ignores capital improvements by convention, but the roof still needs replacing. Reserve 5 to 10% of gross rent for capex separately.
- Confusing cap rate with yield. Cap rate is a valuation metric, not a guarantee of return. Your actual yield depends on rent growth, expense growth, and exit cap rate.
- Comparing across markets. A 5% cap rate in Manhattan and an 8% cap rate in Cleveland are not the same deal at different prices. They are different risk profiles.
A short history of the cap rate
The capitalization rate is older than modern real estate finance. The underlying perpetuity formula dates to 18th-century bond pricing. Appraisers adapted it for commercial real estate in the 1950s through the Band of Investment technique, which weighted mortgage and equity returns to derive a market-implied cap rate. What changed is the data. The National Association of Realtors and Federal Reserve now publish quarterly cap rate indexes by property type. The formula is the same. The transparency is not.