The formula
How to calculate cap rate
The capitalisation rate is a property's net operating income as a percentage of its value. It deliberately excludes financing, so it measures the asset rather than the deal structure — which makes properties comparable regardless of how each is funded.
Commercial property is often valued by inverting this: divide the NOI by the prevailing cap rate for the area and asset class, and you have the price the market would pay.
What to enter:
- Net operating income — annual rent less operating costs, before any mortgage
- Property value
No submit button: type and the answer moves. Your inputs end up in the link, so the page can be shared already filled in.
The order the fields are filled in makes no difference to the result — the calculator recomputes the whole formula from whatever is currently in every field, not step by step. That means it is safe to adjust one number, watch the result change, and adjust it back, without worrying about resetting anything first.
Why cap rate matters
The formula behind cap rate is standard and has not changed in decades; what changes is the situation it gets applied to. Two households can run the identical calculation and land on very different conclusions once their own numbers — income, rate, term, balance — are dropped in, which is why a generic textbook example is less useful than a calculator you can adjust to match your own circumstances.
Beyond a one-off check, the same calculation is worth revisiting whenever the underlying numbers change — a new interest rate, a change in income, a different term. Because the figures live in the page's own web address, coming back to update just one field and compare the new result against the old one takes seconds rather than starting again from a blank page.
It is also worth being clear about what a single figure like this can and cannot settle on its own. It answers the specific question the formula was built to answer, and nothing more — a favourable cap rate result does not automatically mean a decision is a good one overall, since plenty of other factors that a formula cannot capture, from personal circumstances to how comfortable a commitment feels, usually matter just as much as the arithmetic. Use the number as one solid input among several rather than the whole of the decision.
In practice, most people arrive at a page like this one having already tried a version of the calculation by hand or in a spreadsheet, and use the calculator here to confirm it rather than replace it. That is a reasonable way to use it — the two should agree to the last decimal place if the same inputs and the same formula are used, and if they do not, the formula shown above is the one to check your own working against first.
Worked example
Here is the calculation with the starting values:
- Net operating income: 14,400
- Property value: 240,000
That gives:
- Cap rate: 6 %
- Monthly net operating income: 1,200
- Years of NOI to equal the value: 16.67 years
These figures are only the calculator's own starting values, included so the working is visible rather than hidden inside the tool above. Replace them with your own numbers and the same arithmetic applies — nothing about the method changes, only the inputs feeding it.
Reading the result
Cap rates price risk. Prime city-centre offices trade at low rates because the income is considered secure; secondary regional property trades higher because it is not. A high cap rate is compensation, not a bargain.
Where this goes wrong. Including mortgage payments in the NOI. Cap rate is unleveraged by definition — putting financing in makes it uncomparable with every published benchmark.
A useful check on any unfamiliar result is to compare it against a rough mental estimate first — round the inputs to convenient numbers and see whether the calculator's answer lands in roughly the same territory. A wildly different figure usually means one of the fields was entered in the wrong unit, most often a percentage typed as a whole number where a decimal was expected, or the reverse.
It depends on the market. UK residential buy-to-let commonly runs 4–7% net; commercial ranges from around 4% for prime to over 9% for secondary. Compare against local comparables, not an absolute standard.
No. It measures income only. Low cap rate markets are usually those where buyers expect growth to make up the difference.
It returns cap rate. With 14,400 net operating income and 240,000 property value, that comes to 6 %. Change any field and the figure moves with it.
Whenever one of the underlying figures changes — a new interest rate, a different balance, an updated term — since the result only reflects what is currently in the fields. There is no need to keep a separate record of past results; the web address for a filled-in version already carries the figures used to produce it.
Not unless a tax rate or a fee is explicitly one of the inputs above. Where it is not, the figure shown is a gross calculation, and any tax due depends on your personal circumstances and current tax rules, which are worth checking separately.
The arithmetic itself is exact — the calculator applies the formula shown above precisely, with no rounding until the final figure is displayed. The uncertainty, where it exists, is entirely in the inputs: an estimated rate or an approximate balance carries that same approximation through to the result.