A cap rate is a property's yearly net operating income (NOI) divided by its price or value. A building netting $42,000 a year for $600,000 has a 7% cap rate.
Think of it as the return you'd earn buying with cash, before any mortgage or income tax. The Federal Reserve describes cap rates as the annual income of properties "relative to their prices."
What goes into net operating income?
NOI is a property's yearly income minus its operating expenses. Get this number right, and the rest is simple division.
- Income: the rent you actually collect, plus any other income the property earns. Allow for empty months and unpaid rent.
- Operating expenses: JPMorgan's list covers real estate taxes, insurance, utilities, repairs and maintenance, management fees, payroll and professional fees.
- Left out: loan payments, big one-off projects such as a new roof, and the owner's income tax.
Because loan payments stay out, a cap rate describes the building, not your deal. A cash buyer and a borrower get the same cap rate on the same property. The NOI calculator subtracts expenses from income for you.
Whose NOI are you dividing?
A listing's cap rate is only as good as the NOI behind it. Take a small building listed at $750,000. Rents total $72,000 a year and the seller shows $18,000 of expenses, for $54,000 of NOI. That figure assumes no empty months and no paid manager:
| Version of the building's NOI | NOI | Cap rate at $750,000 |
|---|---|---|
| Seller's figure: no vacancy, no manager | $54,000 | 7.2% |
| Less one month of vacancy | $48,000 | 6.4% |
| Less a $500-a-month manager as well | $42,000 | 5.6% |
Two costs the seller left out knock the cap rate from 7.2% to 5.6%. Rebuild NOI yourself from the actual bills and the rent roll: the list of tenants and what each pays.
Turning a cap rate into a price
Flip the formula and you get a value: NOI ÷ cap rate. JPMorgan's guide values buildings this way, using the typical cap rate for similar buildings nearby. Here's the $42,000 of rebuilt NOI at several rates:
| Cap rate buyers apply | Value of $42,000 NOI |
|---|---|
| 5% | $840,000 |
| 6% | $700,000 |
| 7% | $600,000 |
| 7.2%, the rate the asking price implies | $583,333 |
| 8% | $525,000 |
At the 7.2% the asking price implies, the rebuilt NOI supports only $583,333, not $750,000. Notice, too, that each point of cap rate moves the value less than the last. From 5% to 6% the value drops by $140,000; from 7% to 8%, by $75,000.
The calculator above also shows the cap rate with 10% more NOI. It's a quick way to see what a rent rise would do.
What a cap rate doesn't show
Financing
Borrowing only helps when the loan costs less than the building yields. At a 6% cap rate, each $100,000 borrowed at 7% interest earns $6,000 and costs $7,000 a year. The DSCR calculator checks whether NOI covers the loan payments.
Big repairs
Capital spending sits outside NOI. So a building that needs a new roof can show the same cap rate as one that doesn't. Price that work separately, and take it off what you'd pay.
Lease quality
The same NOI from a long lease and from month-to-month tenants isn't equally safe. A high cap rate means a low price per dollar of income. Find out why the market prices it that way before calling it a bargain.
Where market cap rates stand in 2026
You don't pick the cap rate buyers apply: sales of similar buildings set it, and it moves. The Federal Reserve's May 2026 report says cap rates have recovered from the historical lows of 2022. They now sit just below their historical average.
CBRE's survey for the first half of 2026 found the all-property average "essentially flat." Its rates are estimates by CBRE's own valuation professionals. Its stabilized rates assume buildings leased at market rents, with vacancy near the market average. So compare them with stabilized NOI, never with a half-empty building's income.
When another measure fits better
Cap rate compares buildings. For your own purchase, other numbers answer other questions:
- Cash flow after the mortgage: the rental property calculator takes expenses and loan payments off the rent.
- A first screen from rent alone: the gross rent multiplier divides price by yearly rent, ignoring expenses.
- Loan coverage: NOI ÷ yearly debt payments, the DSCR mentioned above.