What is net operating income (NOI)?

NOI is effective gross income minus operating expenses, before debt service and income taxes. It measures the property's income-producing ability independent of financing, which is why it is the basis for cap rate and most commercial valuation.

How is the cap rate calculated?

Cap rate equals NOI divided by the property value or purchase price, expressed as a percentage. A 100,000 NOI on a 1,250,000 price is an 8 percent cap rate. It is the unlevered annual return at the stated price and lets you compare properties of different sizes.

What expenses go into NOI?

Operating expenses include property taxes, insurance, management, maintenance, utilities the owner pays, and reserves for replacements. They exclude mortgage payments, depreciation, capital improvements, and income taxes, which are financing or tax items rather than operating costs.

How does cap rate imply a value?

Rearranging the formula, value equals NOI divided by the cap rate. If comparable properties trade at a 7 percent cap rate and your NOI is 105,000, the implied value is 105,000 divided by 0.07, or 1,500,000. Lower cap rates imply higher values for the same income.

Does cap rate account for my mortgage?

No. Cap rate is an unlevered metric using NOI, which is before debt service. To analyse leveraged returns, look at cash-on-cash return or the debt-service coverage ratio, which incorporate your specific loan terms in addition to the cap rate.

Real Estate Cap Rate & NOI Calculator

Cap rate is the core screening metric for income property: it expresses a property’s unlevered annual return as net operating income over price. This calculator builds NOI from your rents and expenses, computes the actual cap rate at your purchase price, and derives an implied value at any target cap rate.

How it works

Effective gross income feeds NOI, which drives both the cap rate and the implied value:

EGI       = (gross rent + other income) × (1 − vacancy %)
NOI       = EGI − operating expenses
cap rate  = NOI / purchase price
value     = NOI / target cap rate

NOI deliberately excludes mortgage payments, depreciation, and income taxes — it measures the asset’s income, not your financing. Lower cap rates imply higher values for the same income, which is why prime markets trade at low caps.

Example and notes

A property with 180,000 gross rent, 5 percent vacancy, and 60,000 of operating expenses has an EGI of 171,000 and an NOI of 111,000. At a 1,500,000 purchase price that is a 7.4 percent cap rate. If comparable sales support a 6.5 percent cap rate, the implied value is 111,000 divided by 0.065, about 1,708,000. Cap rate is unlevered — to judge leveraged returns, also look at cash-on-cash return and debt-service coverage with your actual loan terms.