Investment

How to Calculate Cap Rate: Complete 2026 Guide

What is Capitalization Rate (Cap Rate)?

The capitalization rate (cap rate) is one of the most important metrics in real estate investing. It measures the potential return on an investment property by comparing the property's net operating income (NOI) to its purchase price or current market value.

Cap rate helps investors quickly evaluate and compare different investment opportunities, determine if a property's asking price is reasonable, and estimate the time it will take to recover their initial investment.

The Cap Rate Formula

Where:

• Net Operating Income (NOI) = Annual rental income minus operating expenses
• Property Value = Purchase price or current market value

Step-by-Step: How to Calculate Cap Rate

Step 1: Calculate Gross Rental Income

Add up all potential rental income for the year. For example, if you have a 4-unit property where each unit rents for $1,500/month:

Gross Rental Income = 4 units × $1,500 × 12 months = $72,000

Step 2: Calculate Operating Expenses

Include all expenses except mortgage payments:

• Property taxes
• Insurance
• Maintenance and repairs
• Property management fees
• Utilities (if owner-paid)
• HOA fees
• Vacancy losses

Example total operating expenses: $22,000/year

Step 3: Calculate Net Operating Income (NOI)

NOI = Gross Rental Income - Operating Expenses

NOI = $72,000 - $22,000 = $50,000

Step 4: Apply the Cap Rate Formula

If the property costs $625,000:

What is a Good Cap Rate?

Cap rates typically range from 4% to 12%, depending on location, property type, and market conditions:

• 4-6%: Low-risk, stable markets (major cities, Class A properties)
• 6-8%: Moderate risk, balanced markets (suburbs, Class B properties)
• 8-12%: Higher risk, emerging markets (rural areas, Class C properties)

Higher cap rates generally indicate higher potential returns but also higher risk. Lower cap rates suggest more stable, lower-risk investments with steady appreciation potential.

Using Zonely's AI-Powered Analysis

Zonely automatically calculates cap rates for over 800 million properties using real-time rental data, expense estimates, and market comparisons. Our AI analyzes 60+ data points to give you instant investment insights including:

• Accurate NOI calculations
• Cap rate analysis
• Cash flow projections
• Comparable property analysis
• Appreciation potential

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