Cap Rate Calculator

The single metric most property investors learn first

Capitalisation rate, or cap rate, is the property investment world’s equivalent of dividend yield: annual net operating income divided by the property’s value. A property generating 15,000 net annual income and worth 300,000 has a cap rate of 5%. It is the standardised comparison measure across property investments, letting a 250,000 multi-let be set against a 1.2m office block on the same basis.

On the calculator defaults, 200,000 of NOI against a 2,500,000 price gives 8.00%, and entering a 7% market rate alongside it values the same income stream at 2,857,142.86, or 357,142.86 above the price paid. The calculator produces the number; the commentary below is about reading it.

What "net operating income" includes

Cap rate’s credibility depends on NOI being calculated honestly. Real NOI is gross rent less a vacancy allowance less operating expenses. Operating expenses include property management fees, repairs and maintenance, insurance, local property taxes where the landlord pays them, service charges, and ground rent where leasehold tenure applies. Commonly quoted planning ranges put management around 8% to 12% of rent where a manager is used and repairs around 5% to 10%, though both depend heavily on building age, tenancy type and local labour costs.

NOI excludes mortgage payments, which belong to the financing rather than the property, income tax on rental profits, and capital expenditure that extends the building’s life such as a new roof or a kitchen replacement. Getting these categorisations right matters, because inflating NOI by omitting costs inflates cap rate and makes bad deals look good.

Cap rate benchmarks by property type

Cap rate ranges vary widely by market, currency, and moment in the interest-rate cycle, so what follows is a relative ordering between asset types rather than a set of current market levels. The ordering is durable; the levels are not.

Prime residential prices at the lowest yields, reflecting capital-preservation demand and strong competition for trophy assets. Standard residential single-lets sit a little above it. Commercial office and retail price higher again, spread by tenant quality, lease length and location, with prime assets at the low end of that range and secondary stock at the high end. Industrial and logistics sit in similar territory, a sector that has drawn strong demand from e-commerce fulfilment. Multi-tenant or room-let residential shows the highest headline yields of the group, compensating for heavier management overhead and regulatory complexity.

A cap rate well outside the usual band for its category usually signals something specific: a high figure often reflects added risk such as vacancy exposure, tenant concentration or building and location issues, while a low one reflects either exceptional quality or a full price. For where the levels actually sit right now, market data is the only reliable source, and the Bank for International Settlements publishes commercial property price indices covering more than twenty countries, updated monthly.

Cap rate vs yield vs ROI

Three confused terms that measure different things.

Cap rate: NOI divided by property value. The unlevered income yield on the asset, independent of how it is financed.

Gross yield: gross rent divided by property value. It ignores expenses entirely, which is why it appears so often in marketing material and so rarely in underwriting.

Cash-on-cash return: annual cash flow after mortgage payments divided by cash actually invested. It accounts for borrowing, and it usually exceeds cap rate on a mortgaged property.

A property with a 6% cap rate, financed at 75% loan-to-value and a 5% borrowing cost, produces a cash-on-cash return of around 9%. The cap rate has not changed; the return reflects the borrowing. Comparing investments means saying which metric is in use: cap rate for asset quality, cash-on-cash for leveraged returns.

What cap rate doesn't capture

Cap rate is a one-year snapshot, and it misses several things.

Capital growth: a property with a 5% cap rate plus 5% annual capital growth produces roughly 10% total return a year. A property with a 7% cap rate and 1% capital growth produces 8%. The lower-cap-rate property wins. Cap rate alone understates prime-market properties and overstates high-yield properties in declining areas.

Future rent growth: properties in growth areas see rent rise over time, so a 5% cap rate today with rising rents produces a growing income stream, while a 7% cap rate in a stagnant area stays at 7% indefinitely. Present cap rate says nothing about that trajectory.

Property risk: single-tenant commercial properties on long leases show low cap rates because they are implicitly pricing low risk. Multi-tenant properties on shorter leases show higher cap rates partly as risk compensation. The same numerical cap rate can represent very different risk profiles.

The cap rate expansion risk

Cap rates move with interest rates. When rates rise, cap rates typically follow, though with a lag of a year or more rather than immediately. Property values fall as cap rates rise, since the same NOI at a higher cap rate implies a lower value. When benchmark rates rose sharply in the early 2020s, commercial property values repriced across many markets, a shift visible in cross-country price indices and documented in central bank financial stability reporting.

Buying at historically low cap rates during low-rate periods can turn into nominal losses when rates climb. Valuations built on historical-normal cap rates rather than recent-peak ones tend to hold up better through a cycle.

Value-add cap rate math

The value-add strategy uses cap rate mechanics to create value: buy an underperforming property at a high cap rate, say 8%, renovate and re-lease at higher rents, then refinance or sell at the lower cap rate typical of well-performing properties, say 6%. The same 20,000 of NOI values at 250,000 at 8% against 333,333 at 6%, an 83,333 gain purely from cap rate compression and before any actual improvement in NOI. Add NOI improvement from better rents on top and the compound gain can be substantial. That is the entire thesis of professional value-add investors, and it is also why the exit cap rate assumption is the one worth stress-testing hardest.

Multi-tenant lets: higher cap rates with higher overhead

Room-let or multi-tenant residential typically shows gross yields well above a standard single-let. The higher headline figure reflects several things.

Higher tenant turnover, since average stays are shorter than in family lets.
Higher management overhead, with multiple rent collections, multiple tenancies and more frequent repair calls.
Regulatory compliance, including licensing, additional fire-safety requirements and periodic inspections in many jurisdictions.
Higher capital spending, from more wear and tear and more frequent redecoration.
A narrower pool of buyers on exit, which can limit liquidity.

Once honest operating costs are deducted, that gross yield settles into a cap rate that is still higher than a single-let’s, but by a narrower margin than the gross figures imply, because multi-tenant overhead absorbs a larger slice of the rent. The premium is largely compensation for complexity rather than pure extra yield. Analyses that apply realistic overhead allowances, rather than assuming the gross yield reaches the bottom line, give a more realistic picture.

The cap rate comparison that matters

The most useful cap rate comparison is not against similar properties; it is against the cost of capital. At a 5% borrowing rate, a 5% cap rate property produces no uplift from borrowing, since the levered return equals the unlevered one. A 7% cap rate against 5% debt produces a 2% positive spread before any capital appreciation. A 10% cap rate against 5% debt produces 5%. The debt market therefore sets the floor cap rate that makes property investing worthwhile at all, and when debt rates rise, that floor rises with them.

What this calculator produces

The tool computes cap rate from purchase price and net operating income, and where a market cap rate is supplied it also values the same income stream at that rate and reports the gap against the price paid. It does not adjust for vacancy, validate the NOI entered, or check anything against market benchmarks. The figure serves as the standardised income-yield measure for comparing properties or testing a specific purchase against a hurdle rate. Full investment analysis layers cash-on-cash return, expected capital growth and risk assessment on top of it.