Cap Rate Calculator

The single metric most property investors learn first

Capitalisation rate (cap rate) is the property investment world's equivalent of dividend yield: annual net operating income divided by the property's value. A property generating 15,000 net annual income worth 300,000 has a cap rate of 5%. Cap rate is the standardised comparison measure across property investments — it lets you compare a 250,000 multi-let against a 1.2m office block on an apples-to-apples basis. The calculator above produces the number; the commentary below is about how to use it intelligently.

What "net operating income" includes

Cap rate's credibility depends on NOI being calculated honestly. Real NOI = gross rent - vacancy allowance - operating expenses. Operating expenses include: property management fees (typically 8-12% of rent if using a manager), repairs and maintenance (budget 5-10% of rent), insurance, local property taxes (where the landlord pays them), service charges, and ground rent where leasehold tenure applies. NOI excludes: mortgage payments (separate from the property itself), income tax on rental profits, capital expenditures that extend property life (new roof, kitchen replacement). Getting these categorisations right matters — inflating NOI by omitting costs inflates cap rate and makes bad deals look good.

Cap rate benchmarks by property type

Cap rate ranges vary widely by market, currency, and moment in the interest-rate cycle, so treat the following as broad, illustrative bands rather than fixed figures:

Prime residential: roughly 3-5%. Low yields reflect capital-preservation demand and strong buyer competition for trophy assets.

Standard residential (single-family lets): roughly 4-6%.

Multi-tenant or room-let residential: roughly 6-10%. Higher headline yields compensate for heavier management overhead and regulatory complexity.

Commercial (office, retail): roughly 5-9%, depending on tenant quality, lease length, and location; prime assets sit at the low end and secondary stock at the high end.

Industrial and logistics: roughly 5-8%, a sector that has drawn strong demand from e-commerce fulfilment.

A cap rate well outside the typical band for its category usually signals something specific: a high figure often reflects added risk (vacancy exposure, tenant concentration, building or location issues), while a low one reflects either exceptional quality or a full price.

Cap rate vs yield vs ROI

Three confused terms that measure different things:

Cap rate: NOI / property value. Unlevered income yield on the asset. Independent of how it's financed.

Gross yield: Gross rent / property value. Doesn't account for expenses. Common in marketing; often misleadingly high.

ROI (cash-on-cash return): Annual cash flow after mortgage / cash invested. Accounts for leverage. Typically higher than cap rate for mortgaged properties.

A property with a 6% cap rate, financed at 75% loan-to-value and a 5% borrowing cost, produces a cash-on-cash return of around 9%. The cap rate hasn't changed; the ROI reflects the leverage effect. Comparing investments requires specifying which metric — cap rate for asset quality, ROI for leveraged returns.

What cap rate doesn't capture

Cap rate is a one-year snapshot. It misses:

Capital growth: A property with 5% cap rate plus 5% annual capital growth produces roughly 10% total return per year. A property with 7% cap rate and 1% capital growth produces 8%. The lower-cap-rate property wins. Cap rate alone understates prime-market properties and overstates high-yield properties in declining areas.

Future rent growth: Properties in growth areas see rent rising over time. A 5% cap rate today with 3% annual rent growth produces a rising income stream. A 7% cap rate in a stagnant area stays at 7% yield forever. Present cap rate doesn't reflect this trajectory.

Property risk: Single-tenant commercial properties with long leases appear to have low cap rates; they're implicitly pricing low risk. Multi-tenant properties with shorter leases have higher cap rates partly as risk compensation. Same numerical cap rate can represent very different risk profiles.

The cap rate expansion risk

Cap rates move with interest rates. When rates rise, cap rates typically follow — not instantly, but over 1-3 years. Property values fall as cap rates rise (same NOI at higher cap rate means lower value). When benchmark rates rose sharply in the early 2020s, commercial cap rates widened materially in many markets, and values fell correspondingly (a higher cap rate on the same NOI implies a lower price). Buying at historically low cap rates during low-rate periods can turn into nominal losses when rates climb. Valuations built on historical-normal cap rates rather than recent-peak ones tend to hold up better through a cycle.

Value-add cap rate math

The "value-add" strategy uses cap rate mechanics to create value: buy an underperforming property at a high cap rate (say 8%), renovate and re-lease at higher rents, and refinance or sell at the lower cap rate typical of well-performing properties (say 6%). The same 20,000 NOI values at 250,000 (at 8%) versus 333,000 (at 6%) — a 83,000 value creation purely from cap rate compression, before any actual improvement in NOI. Add NOI improvement from better rents, and the compound gain can be substantial. This is the entire thesis of professional property value-add investors.

Multi-tenant lets — higher cap rates with higher overhead

Room-let or multi-tenant residential often shows gross yields of 8-12%, well above a standard single-let. The higher headline figure reflects:

Higher tenant turnover (shorter average stays than family lets).
Higher management overhead (multiple rent collections, multiple tenancies, more frequent repair calls).
Regulatory compliance (licensing, additional fire-safety requirements, periodic inspections in many jurisdictions).
Higher capital spending (more wear and tear, more frequent redecoration).
A narrower pool of buyers on exit, which can limit liquidity.

Once honest operating costs are deducted, that 8-12% gross yield settles into a cap rate in the 6-10% band shown above — still higher than a single-let's 4-6%, but by a narrower margin than the gross figures imply, because multi-tenant overhead absorbs a larger slice of the rent. The premium is largely compensation for complexity rather than pure extra yield. Analyses that use honest overhead allowances, rather than assuming the gross yield reaches the bottom line, give a more realistic picture.

The cap rate comparison that matters

The most useful cap rate comparison isn't against similar properties — it's against your cost of capital. If you can borrow at 5% interest rate, a 5% cap rate property produces no uplift from leverage — the levered return equals the 5% unlevered cap rate. A 7% cap rate with 5% debt produces 2% positive leverage before accounting for capital appreciation. A 10% cap rate with 5% debt produces 5% positive leverage. The debt market determines the floor cap rate that makes property investing worthwhile. When debt rates rise, minimum viable cap rates rise with them.

What this calculator produces

The tool computes cap rate from property value and net operating income. It doesn't adjust for vacancy, validate NOI calculations, or compare against market benchmarks. The figure serves as the standardised income-yield measure for comparing properties or evaluating a specific investment against your hurdle rate. For full investment analysis, layer cap rate onto cash-on-cash return, expected capital growth, and risk assessment.