Cap Rate / Real Estate ROI

Overview

Capitalization rate, or cap rate, is the headline yield metric for income-producing real estate. It expresses the annual net operating income (NOI) of a property as a percentage of its purchase price, letting investors compare two buildings on an apples-to-apples basis without worrying about how each was financed. A higher cap rate typically signals more perceived risk, a weaker market, or a value-add opportunity; a lower cap rate signals trophy assets in supply-constrained metros.

Cap rate is unlevered — it ignores the mortgage. Cash-on-cash return, by contrast, measures the annual pre-tax cash flow against the actual cash the investor put in (down payment plus closing costs). Together the two numbers tell you what the property earns on its own and what your equity earns after the bank takes its share. This calculator surfaces NOI, cap rate, and cash-on-cash from raw rent and expense inputs so the financing assumption is transparent.

How it works

NOI = Gross Rental Income − Vacancy Loss − Operating Expenses, where operating expenses include taxes, insurance, management, repairs, utilities, HOA, and reserves, but exclude debt service and depreciation. Cap rate equals NOI / Purchase Price. Annual debt service is the sum of twelve monthly mortgage payments computed from the loan amount, interest rate, and amortization term using the standard amortization formula. Annual cash flow is NOI − Annual Debt Service, and cash-on-cash return is Annual Cash Flow / Total Cash Invested.

Examples

• A duplex purchased at $400,000 grossing $36,000/year with $4,000 vacancy and $9,000 in operating expenses produces NOI of $23,000. Cap rate is 23000 / 400000 = 5.75%.
• The same duplex financed with 25% down ($100,000) plus $5,000 in closing costs, on a 30-year mortgage at 6.5% for $300,000, has roughly $22,750 annual debt service. Cash flow is $23,000 − $22,750 = $250 — cash-on-cash is only 250 / 105000 ≈ 0.24%.
• A 10-unit apartment building at $1.5M with $180,000 in NOI shows a 12% cap rate, suggesting a tertiary market or significant deferred maintenance.
• A trophy Manhattan office bought for $50M with $1.75M NOI prices at a 3.5% cap rate — typical for prime urban assets.

FAQ

Should I include my mortgage in NOI?
No. NOI is unlevered. Putting debt service in NOI inflates the cap rate and breaks comparisons.

Why does cash-on-cash sometimes go negative?
Because debt service exceeds NOI. The property loses money each month and only pays off through appreciation or paydown.

Is cap rate the same as ROI?
No. ROI usually considers total return including appreciation and tax effects over a holding period. Cap rate is a single-year snapshot.

What's a "good" cap rate?
There is no universal answer — it depends on the market, asset class, and risk profile. Compare against recent comps in the same submarket.

Does this account for depreciation tax shields?
No. Depreciation is a non-cash deduction that affects taxes, not NOI.

Try Cap Rate / Real Estate ROI