What is a good cap rate?

It depends entirely on market and risk. Stabilised properties in major metros may trade at 4–5%, while secondary markets or older assets can be 7–9%. Higher cap rates mean higher yield and higher perceived risk.

Does cap rate account for my mortgage?

No. Cap rate is deliberately unlevered so properties can be compared regardless of how each buyer finances them. Use cash-on-cash return to measure levered performance.

Why do property values fall when cap rates rise?

Value is NOI divided by cap rate. If NOI stays flat and the market cap rate moves from 5% to 6%, the value drops by about 17% purely from the denominator.

Should I use actual or pro forma numbers?

Underwrite on trailing twelve-month actuals. Pro forma figures reflect the seller's best case and often understate vacancy, management and repairs.

Does cap rate work for single-family homes?

It can, but single-family values are driven mainly by comparable sales rather than income. Cap rate is most meaningful for multifamily and commercial assets.

Investment Analysis

Cap Rate & Property Value Calculator

Solve for cap rate, value or NOI in either direction.

Inputs

Given

Solve for

Gross annual income

$/yr

Annual operating expenses

$/yr

Purchase price

Results

Computed

Cap rate

8.00%

$32,000 NOI on $400,000

Net operating income$32,000

Operating expense ratio33.3%

Monthly NOI$2,666.67

Cap rate8.00%

Value$400,000

Value per 1% cap change$76,190

Cap rate expresses unlevered yield. Because value equals NOI divided by cap rate, small movements in market cap rates swing valuations sharply — this is why rising interest rates push property values down even when rents hold steady.

8.00% · Cap rate

How this is calculated

Cap rate, value and NOI form a three-way relationship. Know any two and the third follows:

cap rate = NOI ÷ value × 100

value = NOI ÷ cap rate × 100

NOI = value × cap rate ÷ 100

Net operating income itself is income after operating costs but before financing:

NOI = gross income − operating expenses

Operating expenses include property taxes, insurance, management, repairs, utilities paid by the owner and reserves. They exclude mortgage principal and interest, depreciation and capital improvements — including debt in NOI is the most common error in amateur underwriting.

The operating expense ratio, expenses divided by gross income, is a useful sanity check. Residential rentals typically run 35–50%; a seller's pro forma showing 20% usually omits management, vacancy or reserves.

Worked example

Pricing a small fourplex from its income

A fourplex nets $48,000/yr after all operating expenses (its NOI).
Comparable buildings in the area trade around a 6% cap rate.
Value = NOI ÷ cap rate = 48,000 ÷ 0.06 = $800,000.
The seller asks $950,000 — that implies a 5.05% cap rate, richer than the market.
To justify $950,000 at a 6% cap, NOI would need to be $57,000 — about $9,000 more than the building produces.

Common mistakes

Including the mortgage in NOI
Net operating income excludes debt service entirely. Financing varies by buyer; cap rate prices the building, not the loan.
Trusting the seller's NOI
Pro formas routinely omit management, vacancy and reserves. Rebuild NOI from actual leases and bills before multiplying it into a valuation.
Comparing across markets
A 4.5% cap in Toronto and a 7% cap in a small prairie city can both be 'market'. Cap rates price local risk and growth — only compare like with like.