Capitalization Rate Calculator & Educational Investor Guide

What is the Capitalization Rate?

Capitalization rate (cap rate) measures an investment property's unlevered return (the property’s return before considering any financing or debt). To calculate, divide net operating income (NOI) by your property’s value. Use this free cap rate calculator to compute an approximate cap rate and compare two replacement candidates side-by-side when doing diligence for a 1031 exchange.

For an even fuller picture? Pair this tool with our Capital Gains Tax Calculator.

How to Calculate Your Cap Rate

A capitalization rate, or cap rate, is calculated by dividing a property’s net operating income (NOI) by its current market value, then multiplying by 100 to express it as a percentage. NOI is the income the property produces after operating expenses, but before debt service, taxes, depreciation, or financing costs. Here is an example:

An apartment building generates $120,000 in annual NOI. Currently valued at $2 million, the cap rate would be:

120,000/2,000,000 = 0.06 OR 6%

How to Calculate Your Property’s NOI

NOI is determined by subtracting a property’s ordinary operating expenses from its gross operating income. In simple terms:

NOI = Rental Income + Other Property Income − Operating Expenses

So, what counts as income? Think: rent, parking fees, laundry income, storage fees, pet fees, or other recurring revenue generated by the property.

From there, ordinary operating expenses are deducted. Common examples include property taxes, insurance, property management fees, repairs and maintenance, utilities, landscaping, janitorial services, security and other recurring costs necessary to operate the property. 

What doesn’t count? Financing, tax and accounting, capital, or nonrecurring costs, such as mortgage payments, interest, depreciation, income taxes, capital improvements, or one-time expenses that are not part of normal property operations.

Common mistakes include treating mortgage payments as an operating expense, including major capital improvements like a new roof or HVAC replacement, or using gross rent instead of income after vacancy and operating costs.

Illustrative Cap Rate Ranges in 2026

What cap rates are generally seen in today’s market? The short answer is, it depends on your property type. The graphic below breaks cap rates down by property type.

For more real estate data, insights and trends, explore First American’s Economic Center. 

How Can Investors Use Cap Rates During a 1031 Exchange?

During a 1031 exchange, understanding cap rates can help investors more quickly compare replacement property options within the 45-day identification period. After narrowing potential replacement property options, investors can use their ideal cap rate as an initial filter across the three identified properties, comparing each asset’s NOI against its purchase price to understand relative income potential before moving deeper into due diligence. 

At First American Exchange, our experts can help support the exchange workflow by keeping the identification process organized, tracking key deadlines, and helping investors move forward with confidence while they evaluate the best replacement properties for their transaction.

Frequently Asked Questions

What is a cap rate?

A cap rate, or capitalization rate, estimates a property’s annual return based on its net operating income and current value.

How do I calculate cap rate?

To calculate cap rate, divide the property’s annual net operating income by its purchase price or current market value, then multiply by 100. For example, $100,000 in NOI divided by $2 million equals a 5% cap rate.

What is a good cap rate?

A good cap rate can vary greatly, and typical ranges depend on the property type, location, condition, tenant quality, and market risk. Lower-risk properties often have lower cap rates, while higher-risk or value-add properties typically need higher cap rates.

What’s the difference between cap rate and cash-on-cash return?

Cap rate measures property performance without factoring in financing. Cash-on-cash return measures the investor’s return based on actual cash invested, including debt structure, loan payments, and leverage.

Does cap rate include mortgage payments?

No. Cap rate does not include mortgage payments, interest, principal, or other financing costs. It focuses on the property’s operating performance, which makes it easier to compare assets.

How do I calculate NOI?

Net operating income is calculated by subtracting ordinary operating expenses from gross operating income. Income may include rent and property-related fees, while expenses may include taxes, insurance, utilities, maintenance, and management fees.

Why does cap rate matter in a 1031 exchange?

During a 1031 exchange, estimating cap rates can help investors compare replacement properties within the 45-day identification window.

Can I compare two properties using cap rate alone?

Cap rate is helpful, but it should not be the only comparison point. Investors should also evaluate location, lease terms, tenant strength, property condition, future expenses, rent growth, and more.

What is a reverse cap rate calculation?

A reverse cap rate calculation uses NOI and a target cap rate to estimate property value. Divide NOI by the desired cap rate. For example, $120,000 in NOI divided by 6% suggests a value of $2 million.

Does cap rate vary by property type and market?

Yes. Cap rates vary widely by property type, market, asset quality, and investor demand. A strong multifamily property in a high-demand market may trade at a lower cap rate.