Capitalisation rate is how commercial property is compared, because it strips out how the buyer financed the deal. Two investors paying the same price for the same building get the same cap rate even if one paid cash and the other borrowed everything.
What the Cap Rate Calculator does
Divides net operating income by property value. NOI is rental income minus operating expenses, and explicitly excludes mortgage payments — that exclusion is what makes cap rates comparable across deals.
Defaults to a 300,000 property at 2,200 a month.
Open the Cap Rate Calculator and follow the settings and checks below.
What goes in
| Setting | What it means |
|---|---|
| Formula | Net operating income ÷ property value |
| NOI includes | Rent minus operating expenses |
| NOI excludes | Mortgage payments — deliberately |
| Why exclude financing | So deals are comparable regardless of leverage |
| Higher cap rate | Higher return, usually higher risk |
| Lower cap rate | Lower return, usually prime location |
| Compare against | Other properties in the same market |
| Is this advice? | No |
How to use it
- Enter the property value and rent.
- Subtract operating expenses — but not the mortgage.
- Compare the result against similar properties in the same market, not a national average.
Practical advice
A high cap rate is not a bargain, it is a price. Markets price risk into cap rates, so a building yielding 9% where comparable stock yields 5% is usually signalling something — a weak location, a short lease, a difficult tenant or deferred maintenance. The question to ask is what the market knows that makes it cheap.
Common questions
Why does cap rate ignore the mortgage?
Because it describes the property, not the buyer. Two people can finance the same building completely differently; excluding debt lets them compare the asset on equal terms. Cash-on-Cash is the metric that does account for leverage.
Is a higher cap rate better?
It is a higher return and usually a higher risk. Prime, low-risk property in strong locations trades at low cap rates precisely because buyers accept less return for more security. Comparing a high cap rate against a low one without asking why is how people buy problems.
What is a normal cap rate?
It varies enormously by market, property type and interest rates, so a national figure is not much use. Compare against genuinely similar properties in the same area at the same time.
Should I buy based on cap rate?
This calculates a metric; it cannot assess a deal. Cap rate ignores growth prospects, condition, lease terms and your own tax position. Property decisions of this size warrant professional advice.
Useful next tools
- Rental Yield — Gross and net yield on a rental property.
- Cash-on-Cash Return — Annual return on the actual cash you put in.
- Rent vs Buy — Compare renting against buying over your real time horizon.
- Closing Costs Estimator — Estimate the fees on top of the purchase price.
- Mortgage Payoff — How much time and interest extra payments save.
- Investment Growth Calculator — Project an investment with monthly contributions and returns.
Vootkit provides general educational estimates, not mortgage, investment, legal, valuation or financial advice. Lending rules, taxes, transaction costs and property markets vary. Check actual offers and consult appropriately licensed professionals before acting.
Try the tools from this guide
Keep reading
How to Calculate a Mortgage Payment and Total Interest
Calculates the monthly payment on a mortgage, and adds property tax and home insurance so the figure resembles what actually leaves your account.
How to Calculate Whether Refinancing Will Save Money
Compares your current loan against a new one and works out how many months it takes for the savings to cover the refinancing costs.
How to Calculate Cash-on-Cash Return for Property
Divides annual pre-tax cash flow by the cash you actually put in — deposit, closing costs and any initial works — rather than by the property price.