How to read this result
In the default example, cap rate is 6.00%. Results describe this input scenario; they are not a recommendation.
Change one assumption at a time to see how it affects the scenario. Compare periods and cost definitions consistently. Negative results show a modeled shortfall; an unavailable ratio needs a valid denominator.
Formula and methodology
Divide a consistent annual net operating income estimate by the property value or purchase price, then multiply by 100. Use either price or value deliberately and keep that basis consistent when comparing properties.
Enter percentages as whole numbers: 5 means 5%. When used as a factor, the calculation divides a percentage by 100. Percentage outputs multiply the final ratio by 100. Calculations retain precision internally; displayed amounts and rates are rounded to two decimals.
Variables and input definitions
- Annual NOI (USD/year)
- Stabilized net operating income before debt service.
- Property value or price (USD)
- Property value or acquisition price. Minimum: 0.
Worked example
This example uses the exact prefilled inputs above. Reset defaults to restore this scenario after making changes.
| Item | Default scenario |
|---|---|
| Annual NOI | $30,000.00 |
| Property value or price | $500,000.00 |
| Item | Default scenario |
|---|---|
| Cap rate | 6.00% |
Assumptions and limitations
Cap rate depends on the quality and stabilization of the NOI assumption and does not by itself measure leveraged investor return.
Results describe this input scenario; they are not a recommendation.
The tool uses values you supply. It does not retrieve market prices, verify leases or inspect a property. Results exclude items outside the listed inputs. Review local requirements and the relevant contract when a payment, fee or allocation depends on them.
Common mistakes
Gross rent is not NOI. A cap rate calculated from rent before expenses overstates the income yield. A very high cap rate is not proof that a property is desirable.
Sources and method references
These references provide context for the method and terminology. They do not endorse this tool or validate your property assumptions.
- Office of the Comptroller of the Currency — Comptroller's Handbook — Commercial Real Estate LendingNOI, direct capitalization, cap-rate valuation and DCF concepts for commercial real estate.
- Appraisal Institute — Basic Formulas — Income CapitalizationIncome/cap-rate/value relationships, gross income multiplier and debt-coverage formula references.
Frequently asked questions
Does cap rate include the loan payment?
No. Capitalization rate uses NOI before debt service. Loan payments affect equity cash flow and cash-on-cash return.
What happens when property value is zero?
A capitalization rate has no valid denominator at zero property value. The result becomes N/A rather than showing a misleading zero percent.