Cap rate calculator

Net operating income is the property's rent minus the costs of running it: tax, insurance, maintenance, management, vacancy. It is before the mortgage and before income tax. Put the debt service in and you are no longer measuring the property; you are measuring one buyer's financing. Put income tax in and you are measuring one buyer's bracket. Cap rate is a property identity, which is why those two stay out.

On $36,000 of NOI and a $480,000 price the cap is $36000 / 480000 = 0.075$, 7.50 percent. That 7.50 percent is the unlevered yield if NOI stays where it is, the same way a dividend yield is the unlevered yield of a stock if the dividend stays where it is. Neither figure is a return once income moves, and neither knows anything about a loan.

Vacancy and capital items are the usual places NOI gets padded. A seller who quotes rent as NOI has not subtracted the costs. A buyer who treats a one-off repair as an operating cost has understated NOI. The formula will not catch either. It will only divide the number it is given.

A cap rate on its own is a yield. A cap rate against another cap rate is a price. Rearranged, $V = \text{NOI} / \text{cap}$, so the same $36,000 of income at a 6 percent cap is worth $36000 / 0.06 = 600000$, $600,000. This property is offered at $480,000, which is $120,000 below that implied value, or equivalently it is offered at a 7.50 percent cap while the comparison is 6 percent.

Which direction is 'cheap' depends on which cap is the market's. If similar properties really do trade at 6 percent, a 7.50 percent offer is a lower price for the same income. If they trade at 8 percent, this 7.50 percent offer is a higher price. The calculator will not tell you the market cap. It will tell you what this income is worth at the cap you type, which is the only honest thing a formula can do with two numbers.

A second property with $50,000 of NOI at $625,000 is an 8 percent cap. At a 7 percent comparison cap that income is worth $714,285.71, so the $625,000 price sits $89,285.71 below that value.

Borrowing to buy the property does not change the cap rate, because NOI and price do not include the loan. What borrowing changes is the return on the cash you put in, and the fragility of that return, which is the leverage ratio question applied to a house rather than a balance sheet. A higher cap can support more debt service. It does not become a higher cap because you took the debt out.

Cash-on-cash return, which does use debt service, is a different ratio and a different page's job. Mixing it with cap rate is how two buyers of the same building report two yields and then argue about a number that was never the same object.

Cap rate is a one-year snapshot. If NOI is going to grow, a buyer will accept a lower cap today, because some of the return is arriving as growth rather than as this year's yield. That is the same split as dividend yield versus total return on a stock, and the Gordon identity $k = \text{yield} + g$ is the stock-market version of it. A cap rate is the yield piece. It is silent on $g$.

For a growing income stream priced as a present value, the dividend discount calculator is the closest tool on this site, even though it is written in dividends rather than in rent. The algebra is the same: next year's income over required return minus growth.