Cap rate calculator

Capitalisation rate is net operating income divided by property value, expressed as a percentage. It answers one question: what unlevered annual return does this property produce at this price? Because it ignores financing entirely, it lets you compare two buildings on their own merits rather than on the mortgage each buyer happened to secure.

That independence from financing is the whole point. A property is not a better investment because you got a cheaper loan — the loan is a fact about you, not about the asset. Cap rate strips that out so a 6% building in one city can be compared with a 4% building in another.

The number is only as good as the NOI behind it, which is where most published cap rates quietly mislead. A seller quoting a cap rate has every incentive to understate expenses and assume full occupancy.

NOI is effective rental income minus operating expenses. Effective income means gross rent less a realistic vacancy allowance — not the theoretical figure you would collect if the unit were never empty and every tenant always paid.

Operating expenses include management fees, maintenance and repairs, insurance, service charges, property tax where the owner pays it, and utilities not recharged to tenants. They do not include mortgage payments, depreciation or capital improvements. Mortgage interest is a financing cost, and including it turns cap rate into something else entirely.

There is no universal answer, because cap rate prices risk as much as return. Prime residential in a stable capital city might trade at 3–4%; secondary commercial in a smaller market might be 8–9%. The higher figure is not automatically the better deal — it usually reflects thinner tenant demand, older stock, or a market where exit liquidity is worse.

The useful comparison is always local and same-asset-class. A 5% cap rate means something specific in Dubai residential and something quite different in Bangkok condos or Florida multifamily. Comparing across markets without adjusting for risk and growth expectations is how investors talk themselves into bad buys.

Cap rate also says nothing about capital growth. A low-yield asset in an appreciating market can comfortably outperform a high-yield asset in a flat one over a holding period.