The formula
How it works
Size up a rental property with the key investment numbers. Enter the price, monthly rent and your expense and vacancy assumptions to get the net operating income, the cap rate and the gross yield.
FAQ
What is a cap rate?
The capitalisation rate is the annual net operating income divided by the property’s price, expressed as a percentage. It shows the return the property generates before any mortgage, so it lets you compare properties on a like-for-like basis regardless of how each is financed. Higher usually means better value, though often more risk.
What counts as operating expenses?
Everything needed to run the property except the mortgage — property taxes, insurance, maintenance, management, and reserves for repairs. A common rule of thumb puts them around 35–50% of rent. They do not include your loan payment, which is why cap rate measures the asset itself, not your financing.
What is the difference between cap rate and gross yield?
Gross yield is annual rent divided by price, with nothing subtracted. Cap rate goes further and deducts vacancy and operating expenses first, so it reflects the actual income the property keeps, not just the headline rent.
What is a good cap rate?
It depends on the market and the property’s risk, but many investors look for roughly 5–10%, with lower rates in expensive, low-risk markets and higher rates where rents are strong relative to price but risk is greater. Always compare similar property types in similar areas.
Why is vacancy rate included separately from expenses?
Vacancy is lost rent, not a cash cost, so it is subtracted from gross rent before operating expenses are applied. Modeling it separately keeps the assumption visible and easy to adjust for a market with faster or slower turnover.
Does cap rate account for financing or cash-on-cash return?
No — cap rate assumes an all-cash purchase and ignores your mortgage entirely. If you are financing the deal, cash-on-cash return (cash flow after debt service divided by cash invested) is a better measure of your actual return.
Does the calculator factor in appreciation or taxes?
No, it focuses only on the property’s operating income relative to its price. Appreciation potential, income taxes and depreciation benefits all matter to a full investment decision but sit outside the cap rate and gross yield shown here.
About the real estate calculator
This calculator evaluates a rental property using the core metrics investors rely on: net operating income, capitalisation rate and gross yield. It takes the rent, subtracts an allowance for vacancy and a percentage for operating costs, and expresses the result against the purchase price. These figures let you judge whether a property is priced to deliver a decent return before financing enters the picture.
How to use it
Enter the purchase price and the monthly rent, then your assumptions for operating expenses (as a share of rent) and the vacancy rate. The calculator returns the annual net operating income, the cap rate and the gross yield. For example, a $300,000 property renting at $2,200 a month with 35% expenses and 5% vacancy produces a cap rate in the low-to-mid single digits.
The formula
Effective rental income is the gross rent less vacancy; net operating income (NOI) subtracts operating expenses from that. The cap rate is , and the gross yield is annual rent divided by price. Because NOI excludes mortgage payments, the cap rate reflects the property’s own earning power rather than the terms of any loan used to buy it.
Where it is used
Property investors use it to screen listings quickly, ranking them by cap rate before diving into detailed analysis. It helps compare a rental against alternative investments and against other properties in different price brackets. While a full deal analysis also weighs financing, appreciation and taxes, the cap rate and yield are the fast first filter almost every investor starts with.