Cap rate: drag the price
Drag the handle to set the purchase price. Income is held still, so the headline cap rate moves only because the denominator does. A higher price is a lower unlevered yield. The second readout is that same income at a 6 percent comparison cap.
Cap rate
7.50%
Value at 6 percent
$600,000
Income is a fixed $36,000. A higher price is a lower cap. Gap against a 6 percent comparison is $120,000.00. Illustrative arithmetic, not an appraisal or advice.
Net operating income
$36,000, held still so only the price moves the cap.
In short
- Drag the handle right for a higher price and a lower cap.
- Read the cap, then the implied value at 6 percent.
- When the price matches the 6 percent value, the gap is zero.
- Focus the handle and use the arrow keys to step the price.
Income over price, before the loan
Cap rate is net operating income divided by price. NOI is rent minus operating costs, before debt service and tax. Put the mortgage in and you are no longer measuring the property.
How cap rates work is the identity, with the cap rate calculator under the answer. Rearranged, value is NOI over the comparison cap, which is what makes two properties comparable.
Which cap is the market's is not in the formula
A higher cap than the comparison is a lower price for the same income, if the comparison is actually the market. If similar properties trade richer still, this offer is the dear one. The picture will not tell you the market cap. It will tell you what this income is worth at the cap you treat as the comparison.
Yield on a stock is the cousin: a cash yield that is silent on growth.
Borrowing sits outside it
Financial leverage does not change the cap, because NOI and price do not include the loan. What borrowing changes is the return on the cash you put in. How leverage ratio works is that split on a balance sheet. Cash-on-cash return is a different ratio and a different object.
Common questions
Does a higher cap mean a cheaper property?
Only against a comparison cap you trust. A 7.50 percent offer is cheap if similar income trades at 6 percent, and dear if it trades at 8 percent.
Is NOI the same as profit?
No. It is before debt service and before income tax. It is the property, not one buyer's financing or bracket.
Is this an appraisal?
No. It is income over a price you set. It is educational material, not advice.
Keep reading
This page is educational material, not financial advice. The figures come from the formula shown and assume the inputs you enter hold for the whole term. Your own rate, fees, taxes and timing will differ, so treat the output as arithmetic to check a decision against, not as a recommendation.