Real estate
How do you calculate cap rate on a rental property?
Capitalization rate from net operating income (NOI) and property value — plus optional cash-on-cash return.
Quick answer
Cap rate is how institutional investors compare rental properties on a level playing field — it ignores your mortgage and asks: if I bought this building for cash, what percentage of the price comes back as net operating income each year? NOI is rent minus operating expenses and a realistic vacancy allowance, not your loan payment.
Cap rate
3.47 %
- Net operating income (NOI)
- $7,630.00
- Gross annual rent
- 1,400.00
Cap rate = NOI ÷ value — independent of financing. Cash-on-cash needs your down payment and annual debt service. Typical residential cap rates vary widely by city; compare similar neighborhoods, not national averages.
How it works
Cap rate = NOI ÷ purchase price. A 6% cap on a €200,000 building means €12,000 NOI per year before debt. It is useful for comparing two listings in the same city; it does not tell you your personal cash flow if you finance with leverage — that is where cash-on-cash comes in when you add down payment and annual mortgage in the optional fields. Residential cap rates vary block by block; a real estate investing guide helps with market context, but the calculator gives you the number to plug into that comparison.
Net operating income excludes the spending that actually decides the return. Roofs, boilers, windows and facades are capital expenditure, not operating expense, so they sit outside NOI entirely — which means a building quoted at six per cent with a roof due in three years is not a six per cent building. Set aside something like half a per cent to one per cent of value a year for those items before comparing two listings. And read a low cap rate for what it is: it usually means an expensive market rather than a poor property, which is why the same building yields differently depending only on what the city has done to prices.
Frequently asked questions
What is a good cap rate for residential rental?+
In many European cities gross yields of 3–5% are common; higher caps often mean higher risk, worse location or more management work. Compare to local bonds and your cost of borrowing — a 4% cap with 5% mortgage interest and no appreciation is a losing hold unless you have other reasons.
Cap rate vs rental yield — what is the difference?+
Rental yield calculators often use gross or lightly net rent ÷ price. Cap rate standardizes NOI with operating expenses and vacancy baked in — it is closer to how commercial real estate is quoted. Both are useful; cap rate is stricter and better for apples-to-apples deals.
What expenses belong in NOI?+
Property tax, insurance, maintenance reserve, property management fees, common charges you pay as landlord, and vacancy. Not included: mortgage principal and interest, capital improvements, personal income tax — those sit below NOI.
When is cash-on-cash more useful than cap rate?+
When you finance with a mortgage, cap rate shows asset quality; cash-on-cash shows return on the money you actually put in. A low cap property with high leverage can still cash-flow positively — or negatively if rates rise. Fill the optional fields only if you know your annual debt service.
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