Cap Rate Calculator
Reviewed by Hamza Gujjar, Algorithm Architect & Software Developer
Last updated: July 27, 2026Why cap rate is the standard for comparing investment properties
Capitalization rate normalizes a property's income against its price using net operating income rather than gross rent, making it the standard metric investors use to compare income-producing properties with very different expense profiles.
Worked example
For a property with $24,000 in annual net operating income valued at $400,000:
Cap Rate = 24000 / 400000 x 100 = 6.0%
| Cap Rate Range | General Interpretation |
|---|---|
| Below 4% | Lower risk, often prime/stable markets |
| 4% - 8% | Typical range for many rental markets |
| Above 8% | Higher potential return, often higher risk or less desirable area |
Frequently asked questions
How is this different from rental yield? Rental yield commonly uses gross rent, while cap rate uses net operating income, rent minus actual operating expenses like taxes, insurance, maintenance, and property management, but before mortgage payments - this makes cap rate a more accurate profitability comparison across properties with different expense structures.
Does cap rate account for financing? No - cap rate deliberately excludes mortgage payments, since it is meant to evaluate a property's income performance independent of how any specific buyer chooses to finance it.