Calculated from the sample figures using the displayed formula.
What is the cap rate formula?
Net operating income ÷ Property valueCapitalization rate relates annual net operating income to property value.
What do the inputs mean?
- Annual net operating income
- The value entered for annual net operating income. Keep its period and units consistent with the other inputs.
- Property value
- The value entered for property value. Keep its period and units consistent with the other inputs.
How to calculate it step by step
- Define the decision.
Write down what the result will help you compare or decide. - Collect matching inputs.
Use figures from the same period and apply the definitions shown on this page. - Apply the formula.
Net operating income ÷ Property value. - Check the units.
Confirm whether the result is a currency amount, percentage, number of periods or ratio. - Test a second case.
Change one assumption at a time to see what drives the result.
Worked example
Using the sample figures in the calculator, the result is 7.5%. Change one figure at a time and recalculate to see which assumption has the greatest effect. A spreadsheet should return the same result when it uses the same formula, units and timing.
When should you use cap rate formula?
Use it as one unlevered real-estate income yield measure.
Limitations and common mistakes
Cap rate excludes financing and does not replace a complete property cash-flow analysis.
Do not mix annual figures with monthly figures, ending balances with averages, or percentages with whole numbers. Record the definition used so another person can reproduce the result.
Frequently asked questions
What is cap rate formula?
Capitalization rate relates annual net operating income to property value.
How should I use cap rate formula?
Use the formula only after matching every input to the same period, unit and definition. Then compare the result with a worked example and the decision you are trying to make.
What is the most common mistake with cap rate formula?
Cap rate excludes financing and does not replace a complete property cash-flow analysis.
Can I calculate cap rate formula in a spreadsheet?
Yes. Reproduce the displayed equation with separate cells for each input, keep percentages as decimals, and test the spreadsheet against the worked example before replacing the sample figures.
Sources and methodology
This page uses the Financial definitions for the underlying financial or reporting context. Spreadsheet-related behavior is checked against Microsoft’s financial-function documentation. Examples are illustrative and use the formula displayed on the page.