Cap Rate Calculator
Unlevered yield, NOI, GRM, and market-tier comparison for rental property
Last updated: June 2026
Property & Income
Operating Expenses (Annual)
Auto-filled from state (TX) effective property tax rate
of gross rent (typical 8-10%)
of gross rent
NOI Build-Up
Market Tier Comparison
Your computed cap rate of 4.53% sits in: Tier 1 / Coastal Gateway (3-5%)
Yield similar to top-tier markets like San Francisco, NYC, Boston. Low cash yield but historically strong appreciation.
Cap rate excludes debt service on purpose
Traditional cap rate is an unlevered yield. It is NOT cash flow, NOT cash-on-cash return, and NOT IRR. Use cap rate to compare assets against each other and against the risk-free rate. Use cash-on-cash for first-year cash return after the mortgage, and IRR for full-hold total return.
How the Cap Rate Calculation Works
The Formula
Cap Rate = Net Operating Income / Property Value. NOI is built up from gross rent, less vacancy, less every operating expense (taxes, insurance, maintenance, management, HOA, landlord-paid utilities, and a CapEx reserve). It does NOT subtract mortgage principal and interest, that is what makes cap rate the unlevered yield.
Why CapEx Reserve Matters
Roofs, HVAC, water heaters, and parking lots all wear out. Smart investors set aside 5-10% of gross rent each year as a capital expense reserve. If you ignore CapEx, your stated NOI overstates true economic income and your cap rate is inflated.
Gross Rent Multiplier (GRM)
GRM = Purchase Price / Annual Gross Rent. A 10x GRM means it would take 10 years of gross rent to equal the purchase price. GRM is a quick screening number, but it ignores expenses entirely. Use it as a first filter, then dig into NOI and cap rate.
Cap Rate vs Risk-Free Rate
A useful benchmark: cap rate minus the 10-year Treasury yield is the "real estate risk premium." Historically that spread runs 3-5 percentage points. If 10-year Treasurys yield 4.5% and a Tier 1 cap rate is 4.5%, the real estate carries essentially zero risk premium, that is a sign of an overheated market.
Frequently Asked Questions
What does the cap rate actually measure?
Cap rate (capitalization rate) is the unlevered yield of a property: net operating income (NOI) divided by purchase price (or current market value), expressed as a percentage. It strips out financing and shows what the property would yield if you paid all cash. It is the rental real estate equivalent of a stock dividend yield.
Cap rate vs cash-on-cash return vs IRR, which one matters?
Cap rate ignores leverage and shows asset-level yield. Cash-on-cash return divides annual pre-tax cash flow (after mortgage) by your cash invested, it captures the boost or drag from leverage. IRR is the time-weighted total return including all cash flows and sale proceeds. Use all three: cap rate to compare assets, cash-on-cash for early-year cash, IRR for total-deal return.
What is a "good" cap rate?
It depends entirely on the market and risk profile. A 4% cap in San Francisco may be excellent (low risk, high appreciation), a 9% cap in a declining market may be terrible (high vacancy risk, no upside). Compare cap rates to other deals in the SAME market and asset class. Then compare the resulting yield to a risk-free rate (10-year Treasury) plus an equity risk premium of 3-5 percentage points.
NOI vs cash flow, what is the difference?
NOI is income after operating expenses but BEFORE mortgage debt service, depreciation, and income tax. Cash flow is NOI minus principal and interest payments (and capex if not already reserved). Two identical buildings have the same NOI but very different cash flow depending on their mortgage. Cap rate uses NOI deliberately so that financing decisions do not distort the underlying asset yield.
Why do investors prefer a higher cap rate?
A higher cap rate means more income per dollar invested, but it almost always comes with more risk: older buildings, weaker tenants, declining neighborhoods, deferred maintenance, or markets with slow rent growth. The Treasury yield is the floor; everything above it is a risk premium. If a deal advertises a 12% cap in a stable market, assume something is wrong until you prove otherwise.
How does CAGR differ from cap rate?
Cap rate is a single-year snapshot of asset yield. CAGR (compound annual growth rate) is a multi-year return measure, usually applied to total value (price + cash flow + appreciation) over a holding period. A property can have a steady 6% cap rate and still produce a 15% CAGR if rents and prices rise over a 10-year hold.
When is the cap rate misleading?
During lease-up of a newly built or recently renovated property the trailing NOI understates the stabilized yield, brokers will often market the "pro forma" or "stabilized cap rate" which assumes 95%+ occupancy at market rents. Also misleading when the seller has deferred capex (the future buyer absorbs the cost) or when the seller-provided rent roll includes above-market or expiring leases. Always underwrite NOI yourself using market rents, realistic vacancy, and full operating expenses.