Faro Labs / Tools / Cap rate calculator
Cap rate calculator
Capitalization rate measures what a property earns before financing. Enter the purchase price, income, and operating costs to see net operating income and cap rate, with every line shown.
Between 4 and 6%. Typical for stable, competitive markets. Check whether local rent growth justifies the price.
Cap rate excludes mortgage payments by design. For a leveraged return, use the cash-on-cash calculator.
How cap rate is calculated
net operating income = effective gross income − operating expenses
effective gross income = gross rent − vacancy + other income
The important word is operating. Net operating income deliberately excludes your mortgage, because cap rate is meant to describe the property itself rather than how you financed it. Two investors can buy the same building with completely different loans and get the same cap rate: that's the point. It lets you compare properties without your financing muddying the comparison.
What counts as an operating expense
Property tax, insurance, maintenance, capital reserves, property management, HOA dues, utilities you pay, landscaping, and pest control. All of these are ongoing costs of keeping the building running.
What does not
- Mortgage principal and interest. This is financing, not operations.
- Depreciation. A tax concept, not a cash cost.
- Capital improvements that add value. A new kitchen is an investment; a replaced water heater is a reserve draw.
- Your own labor, unless you charge a management fee, but include one anyway, because your time isn't free and a buyer will price it in.
The mistake that inflates almost every listing's cap rate
Listing brokers routinely quote cap rates that omit vacancy, capital reserves, and management. Add those three back and a headline 7.5% frequently becomes a real 5.2%. This calculator includes all three by default for exactly that reason. If you want to see the broker's number, set vacancy, capital reserve, and management to zero, then notice how much the figure moves.
What counts as a good cap rate
There is no universal target. Cap rate prices risk, so a higher number usually means the market is demanding compensation for something.
| Range | Typically means | Common in |
|---|---|---|
| Under 4% | Priced for appreciation, not income | Coastal metros, prime urban |
| 4 – 6% | Stable, competitive, low vacancy risk | Established suburbs, growth cities |
| 6 – 9% | Solid income, moderate risk | Midwest and Southeast metros |
| 9 – 12% | Higher yield with a real reason attached | Secondary markets, older stock |
| Over 12% | Something is being compensated for | Declining areas, heavy deferred maintenance |
A 12% cap rate is not automatically better than a 5% one. It often signals falling rents, a shrinking population, expensive turnover, or a roof that's about to become your problem. Ask what the market knows that the number is telling you.
A cap rate calculation end to end
A duplex listed at $425,000, renting for $3,200 a month combined.
less 5% vacancy − $1,920
effective gross income = $36,480
property tax − $5,300
insurance − $1,800
maintenance (8% of gross) − $3,072
capital reserve (6% of gross) − $2,304
management (8% of gross) − $3,072
total operating expenses = $15,548
net operating income = $20,932
cap rate $20,932 ÷ $425,000 = 4.93%
Note what happened: gross rent of $38,400 on a $425,000 purchase looks like a 9% gross yield. After real operating costs it's a 4.93% cap rate. That gap is where most first-time investors lose money, and it's why the gross rent multiplier is a screening tool rather than an analysis.
Cap rate questions
Should cap rate include the mortgage?
No. Net operating income is calculated before debt service, which is what makes cap rate comparable across properties financed differently. If you want a number that accounts for your loan, cash-on-cash return is the one you want.
Cap rate vs. cash-on-cash return, which should I use?
Both, for different jobs. Cap rate tells you whether the asset is priced fairly relative to comparable properties. Cash-on-cash tells you what your money actually earns given your down payment and loan terms. A property can have a mediocre cap rate and an excellent cash-on-cash return if financing is cheap, and the reverse when rates are high.
What vacancy rate should I assume?
Five percent is a reasonable default in a healthy market, which works out to roughly eighteen days of turnover a year. In markets with soft demand, high turnover, or seasonal tenancy, 8 to 10 percent is more honest. Never use zero, even for a currently occupied property.
Does cap rate account for appreciation?
No, and that's a real limitation. Cap rate measures current income yield only. Low-cap-rate markets are often low precisely because buyers expect appreciation and price it in. Total return combines cap rate, appreciation, loan paydown, and tax treatment.
How do I find the market cap rate for an area?
Calculate it from recently sold comparable properties using their actual rents and expenses rather than the listing's stated numbers. Faro does this automatically for every report and shows the comps behind it.
Every calculator
Skip the manual entry.
Paste a listing and Faro fills all of this in from real comps, then tells you what to offer.
Estimates for analysis and educational use only: not financial, investment, tax, or legal advice. Verify every number independently before making a purchase decision.