Cap rate questions and answers

The capitalization rate, or cap rate, is a property's net operating income for one year divided by its price or value. It shows the yearly return the property would earn if you bought it outright with cash. A property that costs 200,000 and produces 12,000 of net operating income has a cap rate of 6%.

It depends on the market and the type of property. In many markets, residential rentals trade at roughly 4% to 10%. A lower cap rate usually means a pricier, lower-risk property in a strong location; a higher one means more income for the price, but often more risk. Compare a property with similar ones nearby rather than with a fixed number.

Cap rate ignores financing: it treats the property as if it were bought with cash. Cash-on-cash return divides your yearly cash flow after loan payments by the cash you actually put in. ROI usually goes further and includes appreciation, loan paydown and selling costs. Use cap rate to compare properties, and the other two to judge a specific deal.

Two buyers can finance the same building in very different ways. Leaving the loan out makes the cap rate a property-level measure, so you can compare buildings fairly no matter how each buyer pays for them.

Yes, in most cases. Few properties are rented every single day of the year, and some tenants pay late or not at all. A vacancy and credit loss of 3% to 10% is a common assumption; use the real history of the property or local market data when you have it.

Yes. The same method works for apartments, offices, shops, warehouses and mixed-use buildings. For commercial leases, check which costs the tenant pays and which the owner pays, and enter only the owner's costs as operating expenses.

Prices reflect how buyers see risk and growth. In popular cities, buyers accept a lower income return because they expect rents and values to rise and vacancies to stay low, so cap rates are lower. In smaller or less stable markets, buyers want more income in return for more risk, so cap rates are higher.

Cap rate is a snapshot of one year. It does not show future rent growth, changes in value, major repairs coming up, or the effect of a loan. It is also only as accurate as the numbers you enter. Use it as a quick first screen, then look at a full cash-flow analysis before you invest.

The gross rent multiplier is the price of a property divided by its gross yearly income before vacancy and expenses. A property priced at 250,000 that brings in 25,200 a year has a GRM of 9.92. It is quick to work out, but because it ignores costs and vacancy, it is less reliable than the cap rate for comparing properties.

Cash-on-cash return is the yearly cash flow after loan payments divided by the cash you invest. The calculator works out the loan from the price and your down payment, calculates the monthly payment for the interest rate and term you enter, subtracts twelve payments from NOI and divides the result by the down payment plus closing costs.

The debt service coverage ratio (DSCR) is NOI divided by the yearly loan payments. A DSCR of 1.00 means the income only just covers the loan; below 1.00, the owner has to add money every year. Lenders often ask for about 1.20 to 1.25 or more for investment property, but requirements vary by lender, country and property type.

Divide the NOI by the target cap rate. For example, 16,140 of NOI at a target cap rate of 6% gives a value of 269,000. The reverse calculation in the calculator does this for you and can take the NOI straight from your main calculation.

Use whichever matches your records. The Monthly/Annual switch above the expense fields converts the amounts you have already entered, and the results are always shown per year.

Any currency works, as long as every amount is in the same one. The currency menu only changes how amounts are displayed; it does not convert values or change the cap rate.

No. All calculations run in your browser, and your inputs are not sent to a server. The site only remembers your chosen currency and expense period, in your browser's local storage.

Yes. “Copy link” puts all your inputs into the address of the page. Anyone who opens that link sees the same calculation, so you can bookmark it or send it to someone — but keep in mind that anyone with the link can see the numbers.

When interest rates rise, borrowing costs more and safer investments pay more, so buyers usually expect a higher income return from property: cap rates tend to rise and values to fall. When rates fall, the opposite tends to happen. The effect is often gradual and differs from market to market.

Not quite. Gross rental yield is usually the yearly rent divided by the price, with no costs deducted. Net yield deducts costs and comes close to the cap rate, but definitions vary between countries, so check which costs a quoted yield includes.