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.
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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