Cap Rate Calculator Formula

Understand the math behind the cap rate calculator. Each variable explained with a worked example.

Use the Cap Rate Calculator

Formulas Used

Capitalization Rate

cap_rate = (net_operating_income / property_value) * 100

Implied Value at 8% Cap

implied_value_at_8 = net_operating_income / 0.08

Implied Value at 6% Cap

implied_value_at_6 = net_operating_income / 0.06

Variables

VariableDescriptionDefault
net_operating_incomeNet Operating Income (NOI)(USD)36000
property_valueProperty Market Value(USD)450000

How It Works

Understanding the Capitalization Rate

The cap rate measures the expected rate of return on a real estate investment based on its income-producing potential.

Formula

Cap Rate = (Net Operating Income / Property Value) x 100

Interpreting Results

  • A higher cap rate suggests higher potential returns but also higher perceived risk
  • A lower cap rate indicates a more stable, lower-risk investment
  • Typical residential cap rates range from 4% to 10% depending on location and property class

    • Worked Example

    A rental property generates $36,000 per year in net operating income and is valued at $450,000.

    net_operating_income = 36000property_value = 450000
    1. 01Identify the NOI: $36,000 per year
    2. 02Identify the market value: $450,000
    3. 03Cap Rate = $36,000 / $450,000 = 0.08
    4. 04Cap Rate = 8.00%
    5. 05At an 8% cap rate, implied value = $36,000 / 0.08 = $450,000
    6. 06At a 6% cap rate, implied value = $36,000 / 0.06 = $600,000

    Ready to run the numbers?

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