Cap rate calculator
Cap rate connects three numbers: income, price and yield. Know any two and you can solve the third. Pick the direction you need, enter what you know, and add a unit count or gross rent to get price per unit and the gross rent multiplier as well.
Your building
Adds price per unit
Adds gross rent multiplier
Cap rate
- Net operating income
- $300,000
- Value or price
- $6,000,000
- Cap rate
- 5.00%
Ready to size the debt? Run the commercial mortgage calculator.
How to read this
Cap rate is an unleveraged return measure. It says nothing about your financing, your tax position or your hold period. It answers one question only: what yield is this building's income producing against its price, before any debt.
A lower cap rate means a more expensive building relative to its income, and that usually signals a stronger market rather than a worse deal. A higher cap rate means you are buying income more cheaply, and the market is normally pricing something into that: location, tenant quality, building age or management intensity.
British Columbia multifamily generally trades at tighter cap rates than most of the country. A number that looks poor against a national rule of thumb can be entirely normal for Vancouver or the inner suburbs. Compare against local sales, not against a benchmark you read somewhere else.
What net operating income includes and excludes
This is where most cap rate errors are made, and the errors are large. Net operating income is gross income, less a vacancy and bad debt allowance, less the operating expenses required to run the building. Those expenses include property taxes, insurance, utilities the owner pays, repairs and maintenance, property management, caretaking, landscaping, snow removal, elevator and life safety contracts, and a realistic structural reserve.
Net operating income excludes four things that people routinely leave in, and each one inflates the number: mortgage payments, both principal and interest; capital expenditure such as a roof, a boiler or an envelope repair; depreciation; and income tax. Debt is excluded because cap rate is deliberately financing neutral. Capital expenditure is excluded because it is not an operating cost, although a lender will still ask how you plan to fund it.
If a listing shows a cap rate that looks strong, the fastest check is to rebuild the expense side yourself. A missing management fee alone can move a cap rate by half a point. Our glossary defines each term in the calculation.
Going in cap rate and stabilised cap rate
The going in cap rate uses today's income against today's price. It is what you are actually buying on day one, and it is the number a lender starts from because it is the only one supported by a rent roll.
The stabilised cap rate uses the income the building should produce once vacancy is filled, rents have reached market and any repositioning work is complete. On an older building with rents well below market, the two numbers can be far apart, and the gap is the entire business plan.
Both are legitimate. The failure is quoting one and financing the other. Lenders size on in place income and will treat stabilised income as an upside case supported by a plan, a budget and a timeline, not as the starting point.
Why lenders use cap rate for value but size on coverage
An appraiser capitalises the underwritten income at a market cap rate to arrive at value. That value sets your loan to value ceiling. But the loan itself is sized on debt service coverage: the income has to carry the payment with a cushion, at the lender's rate and amortization. The lender advances the lower of the two ceilings.
That is why a building in a tight cap rate market can appraise strongly and still borrow less than the owner expects. High value with thin income means coverage binds first. How DSCR sets your loan amount walks through the arithmetic, and the commercial mortgage calculator shows which constraint binds on your file.
Cap rate questions we hear most
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Have a building in mind?
Send the rent roll and the asking price. We will rebuild the income the way a lender will and tell you what it borrows.