Investor tools
Cap rate calculator
Cap rate is net operating income divided by the property price. It shows what a property earns before any loan, so you can compare homes on equal terms.
Results
- Effective gross income
- $120,000
- Net operating income (NOI)
- $72,000
- Cap rate
- 8.47%
- Operating expense ratio
- 40.00%
Estimates from your inputs only. Not financial, tax or lending advice.
How the cap rate is calculated
Cap rate = net operating income ÷ property price.
Net operating income (NOI) is the income left after operating costs: taxes, insurance, utilities, cleaning, management, repairs and supplies. It leaves out the mortgage, depreciation and income tax, so it describes the property itself rather than how it is financed.
| Step | Formula |
|---|---|
| Effective gross income | Gross income × (1 − vacancy) |
| Net operating income | Effective gross income − operating costs |
| Cap rate | NOI ÷ purchase price |
Cap rates for short-term rentals
Short-term rentals carry costs a long-term rental does not: cleaning after every stay, furniture and linens, utilities, internet, supplies, platform fees and usually a manager. Leave any of these out and the cap rate looks better than it is. Large group homes earn more per night but also cost more per turnover, so use real quotes for cleaning and management.
How to use it
- If you are comparing two homes in the same market, the higher cap rate earns more per dollar of price, before financing.
- If the cap rate is below your mortgage rate, borrowing to buy will usually lower your cash return rather than raise it.
- If you want to see the effect of the loan, use the cash-on-cash return calculator and the DSCR calculator.
Frequently asked questions
What is a cap rate?
The capitalization rate is a property’s net operating income divided by its price. It measures the unlevered yield of the property, before any mortgage.
Does the cap rate include the mortgage?
No. Mortgage payments are left out of net operating income, so the cap rate compares properties regardless of how they are financed. Use cash-on-cash return to include the loan.
What is a good cap rate for a vacation rental?
There is no single good number. It depends on the market, the property’s risk and interest rates. Compare cap rates for similar homes in the same market, and check that the income behind each one is real, not projected.
What costs go into net operating income?
Property taxes, insurance, utilities, internet, cleaning, supplies, repairs and maintenance, management and platform fees, HOA dues and licenses. Leave out the mortgage, depreciation and income taxes.
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