Should loan payments be in NOI?

No. Cap rate is an unleveraged metric. Including debt service would make the same building show different 'cap rates' depending on the buyer's mortgage, which defeats the purpose.

What is the difference between cap rate and ROI?

Cap rate measures the property's income against its full value, ignoring financing. ROI (especially cash-on-cash) measures your personal return on invested cash after financing costs.

How is cap rate used for valuation?

It works in reverse: if similar buildings trade at a 6% cap rate, a building with $60,000 NOI implies a value around $1,000,000 (NOI ÷ cap rate). This income approach is standard for commercial property.

Valuation · Formula v1.0.0

Cap Rate Calculator

Compute the capitalization rate from income, vacancy and expenses, with debt service correctly excluded from NOI.

Currency (display only)

Your inputs

Property value

Annual gross rental income

Scheduled rent for a full year, before vacancy.

Vacancy allowance

Expected share of the year the unit sits empty.

Annual operating expenses(optional)

Taxes, insurance, utilities, maintenance, management, NOT mortgage payments.

Cap rate

5.92%

NOI ÷ property value

Annual gross rental income: $72,000
Vacancy allowance: -$3,600 (5.0%)
Effective gross income (EGI): $68,400
Operating expenses: -$24,000
Net operating income (NOI): $44,400
Cap rateNOI ÷ property value × 100: 5.92%
Implied value at this NOIInverse: value = NOI ÷ cap rate: $750,000

How the Cap Rate works

The capitalization rate is the unleveraged annual return of a property expressed as a percentage of its value. It strips out financing so that different properties can be compared on operations alone.

Start from scheduled gross rent, subtract a vacancy allowance to reach effective gross income (EGI), subtract operating expenses to reach net operating income (NOI), then divide NOI by value.

Because mortgage payments are excluded, cap rate answers 'what does this building earn as a building?', not 'what does my equity earn?' (that is cash-on-cash return).

Formula & terms

Cap Rate = NOI ÷ Property Value × 100, where NOI = EGI − Operating Expenses and EGI = Gross Income − Vacancy

EGI: Effective gross income: scheduled rent after vacancy and credit losses.

NOI: Net operating income: EGI minus operating expenses, excluding debt service, income tax, and capital expenditures.

Worked example

A small office building is worth $750,000 with $72,000 scheduled rent, 5% vacancy, and $24,000 operating expenses.

EGI = $72,000 × 0.95 = $68,400. NOI = $68,400 − $24,000 = $44,400.

Cap rate = $44,400 ÷ $750,000 = 5.92%.

Assumptions & limitations

•Point-in-time, first-year measure; ignores future rent growth, capex, and financing.
•Results are only as reliable as the entered income, vacancy, and expense figures.

Formula reference

Cap Rate = NOI ÷ Property Value × 100, where NOI = EGI − Operating Expenses and EGI = Gross Income − Vacancy

EGI, Effective gross income: scheduled rent after vacancy and credit losses.
NOI, Net operating income: EGI minus operating expenses, excluding debt service, income tax, and capital expenditures.

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Related glossary terms

cap rate noi effective gross income valuation