Cap Rate Calculator
Calculate the capitalization rate (cap rate) for investment properties. Higher cap rates indicate higher potential returns.
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This calculator is for informational and educational purposes only. Results are estimates based on the information you provide and standard financial formulas. This is not financial advice. Consult a qualified financial advisor for decisions specific to your situation. Full Disclaimer
Things to Know
Essential concepts for understanding your results
FormulaHow is cap rate calculated?
Cap Rate = Net Operating Income (NOI) ÷ Property Value × 100. A property generating $50,000 NOI valued at $650,000: cap rate = 7.7%. NOI includes all rental income minus operating expenses (taxes, insurance, maintenance, management, vacancy) but excludes mortgage payments. Cap rate measures unlevered return — what the property earns independent of financing, making it the standard comparison metric for commercial and investment properties.
Rate RangesWhat cap rate ranges indicate about risk and return?
3-5% cap rate: prime locations, strong tenants, low risk (downtown office, Class A apartments). 5-7%: good locations, moderate risk (suburban retail, B-class apartments). 7-10%: secondary markets or value-add properties with higher risk and higher return potential. 10%+: distressed properties, high-vacancy, or markets with declining demand. Lower cap rates mean higher prices relative to income — you are paying for safety and stability. Higher cap rates offer more income per dollar invested but carry more risk.
LimitationsWhat does cap rate NOT tell you?
Cap rate ignores: financing (leverage can make a 6% cap rate property return 12%+ on equity), appreciation potential (a 4% cap rate in a gentrifying neighborhood may outperform a 9% cap rate in a declining area), capital expenditures (a new roof or HVAC system is not in NOI), and tenant quality (one reliable tenant vs twelve unreliable ones at the same NOI). Use cap rate as a starting comparison, not a complete analysis.
A "good" cap rate is 5-10% for most markets — and lower isn't always worse
Cap rate = Net Operating Income ÷ Property Value. It tells you the annual unleveraged return a property would generate if you bought it cash. For most US markets in 2026, healthy cap rates fall between 5% (premium markets) and 10% (secondary/tertiary markets). A low cap rate (4-5%) usually signals a high-demand, low-risk market (Manhattan, San Francisco) — slower yield but higher appreciation potential. A high cap rate (9-12%) signals more risk or less demand — higher yield but harder to sell, more vacancy risk, or more capex needed. The headline number is meaningless without context: compare cap rates only within the same property type, same submarket, and same lease quality.
Cap rate ranges vary dramatically by property type and market quality. Use these 2026 benchmarks to evaluate any prospective deal:
| Property Type | Primary Markets (NYC, SF, LA, DC) | Secondary (Austin, Nashville, Charlotte) | Tertiary (Tulsa, Memphis, Birmingham) |
|---|---|---|---|
| Multifamily (apartment) | 4.5% - 5.5% | 5.5% - 7.0% | 7.0% - 9.0% |
| Single-family rental (SFR) | 4.0% - 5.5% | 5.5% - 7.5% | 7.5% - 11.0% |
| Industrial / warehouse | 4.5% - 5.5% | 5.5% - 6.5% | 6.5% - 8.0% |
| Class A office (high-quality) | 5.5% - 7.0% | 7.0% - 8.5% | 8.5% - 10.0% |
| Class B/C office (older) | 7.0% - 9.0% | 9.0% - 11.0% | 11.0% - 14.0% |
| Retail (strip / grocery anchor) | 5.5% - 6.5% | 6.5% - 8.0% | 8.0% - 10.0% |
| Self-storage | 5.0% - 6.0% | 6.0% - 7.5% | 7.5% - 9.5% |
| Net-lease (NNN, triple-net) | 5.0% - 6.5% | 6.0% - 7.5% | 7.0% - 9.0% |
Ranges reflect Q1 2026 data from CBRE Cap Rate Survey, CoStar, and NAREIT data. Office cap rates expanded significantly post-2022 due to remote work and refinancing pressure; industrial remains tight due to e-commerce demand.
Cap rate alone is just a starting point. The 2-step evaluation framework most institutional investors use:
| Step | What to Check | What "Good" Looks Like |
|---|---|---|
| 1. Cap rate vs. market | Property cap rate vs. CBRE/CoStar benchmark for same property type + submarket | Within 50-100 bps of market median |
| 2. Cap rate vs. 10-yr Treasury | The "spread" between cap rate and the risk-free rate | ≥ 200 bps spread (e.g., 6% cap when 10-yr Treasury is 4%) |
| 3. Cash-on-cash return | Annual cash flow ÷ cash invested (after financing) | ≥ 8% (leveraged); ≥ cap rate (unleveraged) |
| 4. Internal rate of return (IRR) | Cap rate + appreciation + tax benefits, time-weighted | ≥ 12% (residential); ≥ 15% (commercial) |
| 5. Debt service coverage ratio (DSCR) | NOI ÷ annual mortgage payments | ≥ 1.20 (residential); ≥ 1.25 (commercial) |
Five cap-rate mistakes that destroy real estate investments:
- Using "pro forma" NOI instead of actual NOI. Brokers love to show cap rates based on optimistic future numbers ("after we lease the vacant unit at $X and reduce expenses by Y"). Always recalculate cap rate using trailing 12 months of actual income and expenses, not projected ones. The difference between pro forma and actual cap rate can be 200+ bps — turning a "good deal" into a money-loser.
- Excluding capex from operating expenses. The standard NOI calculation excludes major capital expenditures (new roof, HVAC replacement, parking lot resurfacing). But these costs are real, recurring, and significant — typically 5-10% of effective gross income for older properties. Build a capex reserve into your underwriting (1-3% of property value annually), and recalculate the "true" cap rate after capex. Many properties show 7% headline cap rate but only 5% after honest capex accounting.
- Comparing cap rates across property types. A 7% multifamily cap rate is NOT comparable to a 7% office cap rate — they have completely different risk profiles, lease structures, and capex needs. Only compare within property type AND geographic submarket. "I got an 8% cap on this office vs the 5% I'd get on apartments" is meaningless without market context.
- Ignoring lease quality and tenant credit. A 7% cap rate from a single corporate tenant with 15 years remaining on a NNN lease (e.g., Starbucks, Walgreens) is fundamentally different from a 7% cap rate from 12 month-to-month residential tenants. Adjust cap rate expectations for lease quality: short leases or weak tenants should command 100-300 bps higher cap rates to compensate for risk.
- Buying based only on cap rate without total-return analysis. An 8% cap rate in a declining secondary market (population shrinking, jobs leaving) can be a worse investment than a 5% cap rate in a growing primary market (population growing, jobs flowing in). Cap rate is annual income only — appreciation and equity growth are not in the number. Always model total return including expected appreciation, leverage benefits, tax depreciation, and exit cap rate compression/expansion.
Three concrete moves to evaluate a property correctly using cap rate this year:
- Get cap rate comps for your specific submarket BEFORE making an offer. Pull free data from NAREIT public REIT data, your local commercial real estate broker association, or county sales records. Find 3-5 similar property sales in the last 12 months and calculate their cap rates. Your offer should target cap rate within 50 bps of submarket median — anything more aggressive means betting on capex savings or rent growth you may not actually achieve.
- Run the "DSCR stress test" before signing. Calculate Net Operating Income at 90% occupancy (instead of 95% pro forma), with 10% expense growth (vs 3% optimistic). Divide that stressed NOI by your proposed annual debt service. If DSCR drops below 1.10 in the stress scenario, the deal has too little margin. Commercial lenders typically require 1.25+ DSCR — if you can't hit 1.20 in a stress test, expect financing to be hard or expensive.
- Build a 5-year exit cap analysis. What's your assumed exit cap rate in year 5? If you're buying at 6% cap, are you assuming you sell at 6% (flat), 5.5% (compression — gain), or 6.5% (expansion — loss)? Conservative underwriting assumes 25-50 bps cap rate expansion at exit (small loss) — anything more optimistic requires specific justification (gentrification, rezoning, infrastructure investment nearby). Most deals that look great pencil on flat exit caps but fail on realistic 50-bp expansion scenarios.
For current cap rate data, market analysis, and underwriting research, refer to authoritative sources:
- CBRE U.S. Cap Rate Survey — The institutional industry benchmark, published semi-annually with cap rate data by property type and market tier.
- NAREIT Data & Research — Free public REIT performance data covering all property types; useful for cap rate trend analysis.
- CoStar Group — Industry-standard commercial real estate database with cap rate comps (paid subscription, but local brokers often share access).
- NAR Commercial Real Estate Research — National Association of Realtors commercial market reports with cap rate trends.
- Fannie Mae Multifamily Research — Authoritative multifamily cap rate and rental market analysis.
- FRED 10-Year Treasury Yield — For calculating cap-rate-to-Treasury spread as a risk-adjusted return check.
Cap Rate Calculator: Evaluate Rental Property Profitability
The capitalization rate (cap rate) is the most widely used metric for evaluating commercial and investment real estate. It measures the annual return you would earn if you purchased the property entirely with cash — providing a clean, leverage-independent comparison between properties.
Formula: Cap Rate = Net Operating Income (NOI) ÷ Property Price × 100
Enter the property's purchase price and NOI (rental income minus operating expenses, before mortgage) above. The calculator shows the cap rate and how it compares to market benchmarks.
How to Calculate Cap Rate Step by Step
Example: A duplex priced at $350,000. Gross rental income: $3,200/month ($38,400/year). Operating expenses: property tax $4,200, insurance $1,800, maintenance $3,000, vacancy (5%) $1,920, management $0 (self-managed). Total expenses: $10,920. NOI = $38,400 - $10,920 = $27,480. Cap rate = $27,480 ÷ $350,000 = 7.9%.
This 7.9% cap rate means the property generates 7.9 cents in net income for every dollar of purchase price — before financing costs. With leverage (mortgage), the cash-on-cash return will differ depending on your down payment and interest rate. See our Rental Property Calculator for leveraged returns.
Cap Rate Benchmarks by Property Type and Market
| Property Type | Typical Cap Rate Range | What Drives the Range |
|---|---|---|
| Class A multifamily (urban) | 4.0-5.5% | Low risk, strong demand, appreciation potential |
| Class B/C multifamily (suburban) | 5.5-8.0% | Higher yield, moderate risk |
| Single-family rental | 5.0-8.0% | Location-dependent, less scalable |
| Retail (strip mall) | 6.0-9.0% | Tenant quality, lease length |
| Office (Class A) | 5.5-7.5% | Post-COVID uncertainty, WFH impact |
| Industrial/warehouse | 5.0-7.0% | E-commerce demand, low vacancy |
| Self-storage | 5.5-8.0% | Recession-resistant, low maintenance |
According to CBRE and Real Capital Analytics, national average cap rates compressed from 7-8% in 2010 to 5-6% by 2022, then expanded slightly to 5.5-7% in 2023-2025 as interest rates rose. Higher cap rates mean higher income yield but often signal higher risk, worse location, or deferred maintenance. Lower cap rates indicate premium locations with lower risk and stronger appreciation potential.
Cap Rate Trends Post-Rate-Shock: How 2022-2026 Rewrote the Playbook
The 2022-2023 Federal Reserve rate hikes (Fed Funds 0.25% → 5.5%) fundamentally repriced commercial real estate. With the 10-year Treasury rising from 1.5% to 4.5%, cap rates that looked great at 5% in 2021 now look thin — the spread over the risk-free rate has collapsed. Here's how each property type has adjusted:
| Property Type | 2021 Cap Rate (avg) | 2023 Trough | 2026 Current | 2021→2026 Δ | Outlook |
|---|---|---|---|---|---|
| Industrial / Logistics | 4.2% | 4.5% | 5.5% | +130 bps | E-commerce demand remains strong |
| Multifamily (apartment) | 4.0% | 4.8% | 5.5% | +150 bps | Stable; rent growth slowing |
| Self-Storage | 5.0% | 5.8% | 6.2% | +120 bps | Resilient performer |
| Single-Family Rental (SFR) | 4.8% | 5.5% | 6.3% | +150 bps | Improving entry point |
| Net-Lease (NNN) | 5.5% | 6.5% | 6.8% | +130 bps | Long-lease shelter |
| Retail (anchored) | 6.0% | 7.0% | 7.2% | +120 bps | Grocery-anchored strong |
| Office (Class A) | 5.5% | 7.5% | 8.5% | +300 bps | Repricing ongoing |
| Office (Class B/C) | 7.0% | 10.0% | 11.5% | +450 bps | Distressed; high vacancy |
What This Means for Buyers in 2026
Cap rates are nominally higher than at any point in the past decade, which sounds attractive — but the picture is more nuanced:
- Spreads have NOT meaningfully widened. The 10-year Treasury rose ~250 bps (1.5% → 4.0%) while industrial cap rates rose only ~130 bps. Same property, narrower margin of safety vs the risk-free alternative. Many properties are actually less attractive on a spread basis than in 2021, despite higher headline cap rates.
- Refinancing is the dominant 2026 risk. Properties bought at 4.5% cap rates with 3% loans in 2021 are now refinancing at 6.5-7% loans. The cash flow math can flip from positive to negative on refinance — forcing distressed sales. Watch for this as a buying opportunity in 2026-2027.
- Office is the most distressed sector in 50 years. Class B/C office cap rates at 11.5% reflect deep value-trap risk: even high cap rates may not compensate for ongoing tenant losses, remote work permanence, and capex needed to reposition obsolete buildings. Office is "cheap" because it might not work, not because it's undervalued.
- Industrial and multifamily remain landlord-friendly. Despite cap rate expansion, fundamentals (occupancy, rent growth) remain solid in these sectors. They're slightly cheaper than 2021 but not deeply distressed.
Trends based on CBRE U.S. Cap Rate Survey, CoStar Group, and NAREIT data. Cap rates are average; individual properties vary widely based on submarket, tenant quality, lease term, and capex profile. Past trends do not guarantee future results.
Cap Rate Limitations
Cap rate ignores financing: It assumes all-cash purchase. Two investors buying the same 7% cap rate property — one with cash, one with 25% down at 7% interest — will earn very different actual returns. Use cash-on-cash return for leveraged analysis.
Cap rate ignores appreciation: A 4.5% cap rate in a rapidly appreciating market (3-5% annual appreciation) may produce 15-20%+ total return. A 9% cap rate in a declining market may produce negative total return despite high income yield.
Cap rate is a snapshot: It reflects current NOI and current price. If rents are below market (upside potential) or above market (risk of decline), the cap rate may be misleading. Always analyze pro-forma NOI (projected after improvements) alongside the in-place cap rate.
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