The capitalization rate (cap rate) is the headline measure real-estate investors use to compare income properties. It expresses a property’s annual return based on its income and price, ignoring any mortgage, so two deals can be compared on a like-for-like basis regardless of how each is financed. Enter the net operating income and the property value to get the cap rate instantly.
How it works
The cap rate is net operating income (NOI) divided by the property value, expressed as a percentage:
cap rate = (annual NOI ÷ property value) × 100
NOI is your rental income minus operating expenses — property taxes, insurance, maintenance and management — but before any loan repayments. Because financing is excluded, the cap rate reflects the property’s own earning power rather than your borrowing terms.
Example
A property generating $36,000 NOI per year, valued at $600,000:
(36,000 ÷ 600,000) × 100 = 6.0%
| NOI (annual) | Property value | Cap rate |
|---|---|---|
| $36,000 | $600,000 | 6.0% |
| $45,000 | $600,000 | 7.5% |
| $36,000 | $450,000 | 8.0% |
So at the same income, paying less for the property raises the cap rate. All calculations stay in your browser — nothing is uploaded.