The cap rate is a property’s net operating income divided by its price — the quick yardstick for comparing investment properties. A higher cap rate means more income per dollar of value.
The example
$48k NOI on a $600k property.
| A | B | |
|---|---|---|
| 1 | Item | Value |
| 2 | NOI | 48000 |
| 3 | Price | 600000 → 8.0% |
The formula
The formula:
How it works
How it works:
- Net operating income (NOI) is annual rental income minus operating expenses — before mortgage payments.
- Divide NOI by the property value (or purchase price) and format as a percentage.
- Rearrange to value a property from a target cap rate:
value = NOI / cap_rate. - Cap rate ignores financing — it measures the asset, not the deal’s leverage.
Cap rate as a valuation tool: if comparable properties trade at a 7% cap, a property with $70k NOI is worth roughly 70000 / 0.07 = $1,000,000. Investors flip the formula constantly — income and a market cap rate imply a value.
Try it: interactive demo
NOI and property value.
Variations
Value from cap rate
Reverse it:
NOI from cap & value
Implied income:
On purchase price
Going-in cap:
Pitfalls & errors
NOI excludes the mortgage. Operating expenses only — debt service is not subtracted for cap rate.
Value can’t be zero. A missing price gives #DIV/0!.
Compare like with like. Cap rates vary by market and asset class — context matters.
Practice workbook
Frequently asked questions
How do I calculate cap rate in Excel?
How do I value a property from a cap rate?
Does cap rate include the mortgage?
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