Cap Rate Calculator | NOI, Expense Ratio & What Is a Good Cap Rate | Lofty
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Cap Rate Calculator
Enter a property value, rent, vacancy, and operating expenses to get cap rate, annual NOI, effective gross income, expense ratio, gross rental yield, and the 1% rule in one pass.
Your numbers
| Field | Value |
|---|---|
| Property value / purchase price$ | |
| Gross monthly rent$ | |
| Vacancy rate% | 8–10% is a common conservative assumption. |
| Annual operating expenses$ | Taxes, insurance, repairs, management, HOA, utilities, and reserves. No mortgage. |
What is a cap rate calculator?
A cap rate calculator divides a property's annual net operating income (NOI) by its value or purchase price to show the unleveraged yield of a rental property. Because it ignores financing, cap rate is the standard way investors compare income properties across markets, and most U.S. residential deals fall between 4% and 8% in 2026.
How investors usually read these numbers
| Metric | Often strong | Watch out | Why it matters |
|---|---|---|---|
| Cap rate (Class A markets) | 4% to 6% | Below your mortgage rate | Prime metros trade at lower cap rates because risk and vacancy are lower and appreciation is stronger. |
| Cap rate (Class B/C markets) | 6% to 8%+ | Below 5% | Older or working-class properties need higher income yields to compensate for higher maintenance and turnover. |
| Expense ratio | 35% to 45% of EGI | Above 55% | Shows how much of effective income operating costs consume before debt service. |
| Gross rental yield | 8% to 10%+ | Below 6% | A quick pre-expense comparison of rent to price across markets. |
| 1% rule | Near or above 1.0% | Below 0.6% | Fast screen on whether rent is high enough relative to price to plausibly cash flow. |
How to run a cap rate analysis
Enter the property value
Use the purchase price for a deal you are underwriting, or the current market value for a property you already own.
Add gross monthly rent and other income
Use signed leases or local comps. Add parking, laundry, or storage income separately so the calculator can build effective gross income.
Set a vacancy rate
Most underwriters use 8% to 10% for long-term rentals. Use local vacancy data if you have it.
Enter annual operating expenses
Include taxes, insurance, repairs, management, HOA dues, utilities you pay, and reserves. Do not include mortgage payments, cap rate is calculated before debt.
Read cap rate, NOI, and the supporting metrics
Compare the cap rate against local market averages and your borrowing rate, then sanity-check the expense ratio and 1% rule.
The math behind the result
Core formulas
- Effective gross income (EGI) = (monthly rent x (1 - vacancy rate) + other income) x 12.
- NOI = effective gross income - annual operating expenses. Mortgage payments are excluded.
- Cap rate = annual NOI / property value or purchase price.
- Expense ratio = annual operating expenses / effective gross income.
- Gross rental yield = annual gross rent / property value.
- 1% rule = monthly rent / property value. A quick screen, not a verdict.
Expert takeaways
- Cap rate strips financing out of the comparison. Two investors with different loans see the same cap rate on the same property, which is why it is the standard screening metric.
- A cap rate below your borrowing rate means negative leverage: every dollar of debt lowers your return instead of raising it. In a 6.5% to 7% mortgage environment, sub-5% cap rates need an appreciation thesis to work.
- Cap rate and cash-on-cash answer different questions. Cap rate rates the property; cash-on-cash rates your deal after the loan. Always look at both before offering.
- Class matters. Class A properties in strong metros trade at 4% to 6% cap rates because risk is lower; Class B and C properties usually need 6% to 8%+ to compensate for older systems and rougher tenant turnover.
- Be suspicious of pro-forma cap rates. Sellers often quote NOI with below-market vacancy, no management fee, and no reserves. Recompute NOI with your own assumptions before trusting the number.
Key terms in plain English
- Cap rate: Annual NOI / property value. Capitalization rate measures the unleveraged income yield of a property: annual net operating income divided by value or purchase price. Because it excludes financing, it is the cleanest way to compare income properties across markets and against other yield investments.
- NOI: Income after operating expenses, before debt. Net operating income equals effective gross income minus operating expenses such as taxes, insurance, repairs, and management. It excludes mortgage payments, depreciation, and income taxes, and it is the numerator in both cap rate and DSCR.
- Effective gross income: Rent after vacancy, plus other income. Effective gross income (EGI) is scheduled rent reduced by a vacancy allowance, plus other income such as parking or laundry.
- Expense ratio: Operating expenses / EGI. The expense ratio shows what share of effective income is consumed by operating costs.
- Gross rental yield: Annual gross rent / property value. Gross rental yield compares total scheduled rent to price before any expenses.
People also ask
- What is a cap rate calculator? A cap rate calculator estimates a rental property's capitalization rate by dividing annual net operating income (NOI) by the property's value or purchase price.
- How do you calculate cap rate? Cap rate equals annual NOI divided by property value.
- What is a good cap rate in 2026? Most U.S. residential investors consider 6% to 8% a good cap rate in Class B and C markets.
- What is the difference between cap rate and cash-on-cash return? Cap rate measures the property's unleveraged yield; cash-on-cash return measures your leveraged yield.
- Does cap rate include mortgage payments? No, cap rate is calculated from net operating income, which excludes mortgage payments.
- Is a higher cap rate always better? Not necessarily. A higher cap rate may signal more risk.
- What is the difference between cap rate and gross rental yield? Gross rental yield ignores all expenses, while cap rate includes them.
- How does vacancy affect cap rate? Vacancy directly reduces effective gross income and therefore NOI.
- Can I use cap rate to value a property? Yes, using the formula value = NOI / cap rate.
- Do cap rates change with interest rates? Yes, cap rates tend to drift up when borrowing costs rise.