The Cap Rate Formula, in All Three Directions

One formula, three jobs: find the cap rate, back out the income, or set the price. Master all three and you can underwrite any income property on a napkin.

The cap rate formula is (annual net operating income / property price) x 100. Rearranged, it also gives NOI = cap rate x price, and price = NOI / cap rate. Example: $18,000 of NOI on a $250,000 price is a 7.2% cap rate, and that same $18,000 of NOI supports a $257,142.86 price at a 7% target rate.

Direction 1: find the cap rate

Cap rate = (annual NOI / price) x 100. A property earns $18,000 of net operating income a year and is priced at $250,000. Divide $18,000 by $250,000 to get 0.072, multiply by 100, and the cap rate is 7.2%. This is the listing-screening direction: given an asking price and the income, is the yield worth your time?

Direction 2: find the NOI

NOI = cap rate (as a decimal) x price. A broker quotes a 6.5% cap rate on a $400,000 building. Multiply 0.065 by $400,000: the implied NOI is $26,000 a year. This direction is a lie detector. If the seller's stated income is $34,000 but the quoted cap rate implies $26,000, something in the expense assumptions does not add up, and you have your first question for the seller.

Direction 3: find the price

Price = NOI / cap rate (as a decimal). You require a 7% yield and a property produces $18,000 of NOI. Divide $18,000 by 0.07: the maximum price that delivers your yield is $257,142.86. This is the offer-setting direction: it turns a required return into a ceiling price. Our calculator has a dedicated mode for exactly this: enter NOI and a target rate, and it returns the price. Try it on our free cap rate calculator.

Starting from monthly rent

Most listings quote rent monthly, so annualize first. A unit rents for $2,000 a month: $2,000 x 12 = $24,000 a year. Subtract a 5% vacancy and collection allowance ($1,200) for effective income of $22,800, then subtract annual operating expenses of $9,600 (taxes, insurance, maintenance). NOI = $13,200. On a $200,000 price, the cap rate is $13,200 / $200,000 x 100 = 6.6%. The annualization step is where beginners slip: never divide monthly rent by the price directly.

Which price do you use?

Use the price you would actually pay. For a deal you are underwriting, that is your offer price, not the asking price; listings priced ambitiously flatter their own cap rates. For a property you already own, use current market value, which is how appraisers apply the formula in reverse (value = NOI / market cap rate). Mixing asking price with someone else's NOI is how mediocre deals get dressed up as good ones.

What the formula assumes

The formula treats this year's NOI as stable forever, which no property is. It ignores rent growth, future vacancies, capital spending, financing, and taxes. That is fine for screening and comparison, which is the formula's job, but it is why the cap rate is a starting point rather than a verdict. See how exit cap rates extend this formula into a sale price when you model the full holding period.

Skip the hand math

Our free calculator solves the formula in both directions: NOI and price to cap rate, or NOI and target rate to price, with monthly NOI and the income multiple included.

Try the free cap rate calculator

Cap rate formula questions

What is the basic cap rate formula?

Cap rate = (annual net operating income / property price) x 100. A property with $18,000 of NOI priced at $250,000 has a cap rate of 7.2%. The same formula rearranged gives NOI = cap rate x price, and price = NOI / cap rate.

How do you calculate cap rate from monthly rent?

Annualize everything first. Multiply monthly rent by 12, subtract a vacancy allowance and a full year of operating expenses to get annual NOI, then divide by the price. Example: $2,000 monthly rent is $24,000 a year; with $9,600 of expenses and a 5% vacancy allowance ($1,200), NOI is $13,200, a 6.6% cap rate on a $200,000 price.

How do you find the price from a cap rate?

Rearrange the formula: price = NOI / cap rate (as a decimal). With $18,000 of NOI and a 7% target cap rate, the price is $18,000 / 0.07 = $257,142.86. This is how investors set their maximum offer for a required yield.

Do you use the asking price or the purchase price in the cap rate formula?

Use the price you would actually pay: the purchase price for a deal you are underwriting, or the current market value for a property you hold. Asking prices are often aspirational, so a cap rate based on the ask can flatter a listing; always rerun it at your offer price.

Why multiply by 100 in the cap rate formula?

Dividing NOI by price gives a decimal (0.072); multiplying by 100 converts it to the familiar percentage (7.2%). It is the same value, just the conventional way cap rates are quoted, like interest rates.