Cap rate is only as good as the NOI behind it. This True Cap Rate Calculator rebuilds NOI from your own income and expense assumptions, then divides it by the property value to produce a cap rate you can trust. It also runs the calculation in reverse: enter a target cap rate and see what the property is worth to you at that return.
What's included
- True NOI rebuilt from income, vacancy and eight expense categories
- Cap rate calculated on your entered value or purchase price
- Reverse valuation: estimated value at your target cap rate
- Effective gross income and total operating expenses shown
- Works for single-family, small multifamily and commercial
How cap rate is really used
Cap rate does two jobs. It converts income into value, and it prices risk. A 5% cap rate implies buyers accept less current income because they expect growth or stability; a 9% cap rate usually signals thinner tenant demand, older stock or a weaker market. Neither number is 'good' on its own — it is only meaningful next to comparable sales in the same submarket.
Why advertised cap rates are often overstated
Marketing cap rates frequently assume zero vacancy, no management fee, no reserves, and last year's tax bill rather than the reassessed amount a sale triggers. Recomputing NOI from your own assumptions often moves an advertised 8% cap rate down by a full point or more. That gap is the difference between a deal that works and one that only works on paper.
How to interpret your results
Compare your true cap rate against recent sales of similar properties, not against a national average. Then use the target cap rate field as a negotiating tool: if your required return is 7% and the calculator says the property is worth $250,000 at that return while the ask is $290,000, you now know the size of the gap in dollars rather than in opinion.
Key formulas
NOI = Effective Gross Income - Operating Expenses Cap Rate = (NOI / Property Value) × 100 Value at Target Cap Rate = NOI / Target Cap Rate Example: $17,500 NOI ÷ 7% target = $250,000 estimated value
Worked example: $250,000 duplex at $2,100 rent
- Annual rent: $2,100 × 12 = $25,200
- Vacancy at 6%: -$1,512 → effective gross income $23,688
- Operating expenses: taxes $3,000 + insurance $1,400 + management $2,016 + maintenance $2,000 + utilities $480 + other $400 = $9,296
- True NOI: $23,688 - $9,296 = $14,392
- Cap rate: $14,392 ÷ $250,000 = 5.76%
- At a 7% target cap rate: $14,392 ÷ 0.07 = $205,600 estimated value
True cap rate 5.76% versus a 7% requirement — the property would need a price near $205,600 to meet that target.
Frequently Asked Questions
What is a good cap rate?
It depends entirely on market and asset quality. Stabilised property in high-demand metros often trades at 4–6%, while secondary markets and older stock may trade at 7–10%. Judge your cap rate against comparable local sales rather than a national benchmark.
Does cap rate include the mortgage?
No. Cap rate uses NOI, which is calculated before debt service. That is why two buyers with different loans compute the same cap rate on the same building.
How do I value a property from a cap rate?
Divide NOI by the cap rate expressed as a decimal. $14,000 NOI at a 7% cap rate implies roughly $200,000 of value. This calculator does that automatically in the target cap rate field.
Should I use purchase price or market value?
Use purchase price to measure the return you are buying, and market value to estimate what the property is worth today. Running both is useful when you suspect you are buying below market.
Educational tool only — results are hypothetical projections from your assumptions, not financial, tax, legal or investment advice.