Enter Values

$
Annual effective gross income
$
Annual operating expenses (excl. debt service)
$
Market value or purchase price
%
Target cap rate for valuation

NOI Definition

Operating Expenses Include:

  • Property taxes & insurance
  • Maintenance & repairs
  • Utilities & property management
  • Landscaping, legal, accounting

Do NOT Include:

  • Debt service (mortgage)
  • Depreciation
  • Capital expenditures
  • Income taxes

Note: Some analysts deduct replacement reserves from NOI. This calculator uses NOI before reserves.

Ryan O'Connell, CFA
Calculator by Ryan O'Connell, CFA

Calculation Result

Net Operating Income (NOI)
$80,000
Gross Income - Operating Expenses
Cap Rate 6.67% NOI / Property Value
Expense Ratio 33.33%
Price per NOI $ $15.00

Formula Breakdown

Cap Rate = NOI / Property Value
Where NOI = Gross Income - Operating Expenses

Cap Rate Context by Property Type

Property Type Relative Cap Rate Why
Class A Multifamily Lower Prime locations, stable demand
Class B/C Multifamily Higher More management-intensive
Single-Tenant NNN Varies Depends on tenant credit
Industrial/Logistics Varies Demand trends affect pricing
Office Higher Occupancy trends vary
Self-Storage Moderate Historically stable demand
Cap rates vary significantly by market, property condition, tenant quality, lease terms, and economic conditions. A "good" cap rate depends entirely on the risk profile. Always compare to recent comparable sales in your submarket.

Understanding Cap Rates

What is a Capitalization Rate?

A capitalization rate (cap rate) is the ratio of a property's Net Operating Income (NOI) to its current market value or purchase price. It's expressed as a percentage and measures the potential return on a real estate investment, independent of financing.

Cap Rate Formulas
Cap Rate = NOI / Property Value
Property Value = NOI / Cap Rate
NOI = Gross Income - Operating Expenses

Understanding Net Operating Income (NOI)

NOI is the annual income generated by a property after deducting operating expenses, but before debt service and income taxes. Getting NOI right is critical for accurate cap rate analysis.

Critical: Do NOT include mortgage payments, depreciation, capital expenditures, or income taxes in operating expenses. Including these would materially misstate your NOI and cap rate.

High Cap Rate vs. Low Cap Rate

Higher Cap Rate

Generally indicates higher potential returns but also higher risk. Often seen in secondary markets, older properties, or management-intensive assets. May reflect concerns about income stability.

Lower Cap Rate

Generally indicates lower risk but also lower returns. Typical of prime locations, institutional-quality assets, and properties with stable, creditworthy tenants.

Going-In vs. Stabilized Cap Rate

  • Going-in cap rate: Based on Year 1 or current in-place NOI. Reflects the property's immediate performance.
  • Stabilized cap rate: Based on projected NOI at full or typical occupancy. Useful for properties with current vacancy or during lease-up.

This calculator computes the going-in cap rate based on the NOI you provide.

Practical Applications

  • Property Valuation: Estimate market value from NOI and market cap rates
  • Investment Comparison: Compare returns across different properties
  • Acquisition Analysis: Evaluate if a property is fairly priced
  • Market Analysis: Track cap rate trends in a market over time
Limitation: Cap rate ignores financing. Two investors buying the same property at different leverage levels will have different cash-on-cash returns, even though the cap rate is identical.

Frequently Asked Questions

A capitalization rate (cap rate) is the ratio of a property's Net Operating Income (NOI) to its current market value or purchase price. It's expressed as a percentage and is used to estimate the potential return on a real estate investment, independent of financing. Cap Rate = NOI / Property Value.

NOI is calculated as Gross Income minus Operating Expenses. Operating expenses include property taxes, insurance, maintenance, utilities, and property management fees. Critical: Do NOT include debt service (mortgage payments), depreciation, capital expenditures, or income taxes in operating expenses - including these is a common mistake that will materially misstate your NOI.

There is no universal "good" cap rate. Cap rates vary significantly by property type, location, property condition, tenant quality, and market conditions. Generally, higher cap rates indicate higher potential returns but also higher risk, while lower cap rates suggest lower risk but also lower returns. Always compare to recent comparable sales in the same submarket and consider the risk profile of the specific property.

Cap rate measures property performance independent of financing (NOI / Property Value), while cash-on-cash return measures the return on actual cash invested after debt service (Annual Cash Flow / Total Cash Invested). Cash-on-cash return accounts for leverage; cap rate does not. Two investors buying the same property at different leverage levels will have identical cap rates but different cash-on-cash returns.

Cap rates reflect perceived risk and required return. Class A properties in prime locations typically have lower cap rates due to stable income and lower risk. Older properties, secondary markets, or management-intensive assets typically have higher cap rates to compensate investors for additional risk. Market conditions, interest rates, and investor demand also affect cap rates across property types and locations.

Going-in cap rate uses Year 1 or current in-place NOI, reflecting the property's immediate performance. Stabilized cap rate uses projected NOI at full or typical occupancy, useful for properties with current vacancy or lease-up situations. This calculator computes the going-in cap rate based on the NOI you provide.
Disclaimer

This calculator is for educational purposes only. Cap rate analysis is just one tool for evaluating real estate investments. Actual investment decisions should consider additional factors including market trends, property condition, tenant quality, lease terms, financing costs, and local economic conditions. Consult a qualified real estate professional or financial advisor for investment decisions.

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