How to Calculate Cap Rate
To calculate cap rate, divide annual net operating income by the property value or purchase price. Cap rate estimates property yield before financing and should be compared with cash flow, DSCR, and cash-on-cash return.
Estimates are based on your inputs and assumptions. DealSharp does not provide financial, investment, legal, tax, or lending advice.
Run the number, then pressure-test the assumptions.
To calculate cap rate, divide annual net operating income by the property value or purchase price. Cap rate estimates property yield before financing and should be compared with cash flow, DSCR, and cash-on-cash return.
Use this page to understand the metric directionally, then compare it against financing, reserves, repair risk, cash flow, and your own constraints.
Cap rate = annual NOI / property value
If annual NOI is $24,000 and the property value is $400,000, cap rate is 6%.
Use the formula inside a full deal model
DealSharp helps compare assumptions, debt service, cash flow, and risk flags so this metric is not reviewed in isolation.
Open DealSharpHow to read this number
The useful move is not treating one number as a final answer. Use it to decide which assumptions deserve more review, then compare the result against cash flow, financing, reserves, repair risk, and your own constraints.
Inputs required
- Metric inputs shown in the formula or calculator.
- Income, expense, debt, value, and cash assumptions where relevant.
- Investor-provided numbers that should be checked against source documents.
Outputs explained
- Scenario estimate based on the inputs.
- Plain-English context for comparing the metric.
- Limitations and assumptions to review before relying on the result.
Assumptions to review
- Inputs are estimates supplied by the user.
- Market rent, lender terms, taxes, insurance, repairs, and legal details can change the result.
- DealSharp does not provide financial, investment, legal, lending, tax, or accounting advice.
What this tells you
- Cap rate helps compare income-producing properties before debt.
- It can also help test whether price and NOI are aligned with similar assets.
- It is most useful when NOI is realistic and comparable.
What this does not tell you
- Cap rate does not include your loan, cash invested, tax situation, or future sale.
- It should not be used alone to decide whether to buy.
Common mistakes
- Using rent instead of NOI.
- Forgetting vacancy and operating expenses.
- Comparing stabilized cap rate against current cap rate without labeling the difference.
FAQ
Should I use purchase price or market value?
Use the denominator that matches your analysis and label it clearly. Purchase price is common for acquisition analysis.
Can cap rate be negative?
If NOI is negative, cap rate can be negative, which signals the operating assumptions need closer review.
Run the full deal before deciding
This page helps with one metric or workflow. DealSharp is built for full real estate deal analysis: assumptions, financing, cash flow, repair scenarios, DSCR, cap rate, and risk flags based on your inputs.
Open DealSharpDisclaimer
DealSharp provides calculation and scenario-modeling tools for informational purposes only. Outputs are estimates based on your inputs and assumptions. DealSharp does not provide financial, investment, legal, lending, tax, or accounting advice. Verify important decisions with qualified professionals.