Cap rate calculator

Cap rate answers one specific question — what would this property return bought entirely in cash — which is exactly why it stays flat while cash-on-cash return and DSCR swing wildly based on how the deal is actually financed.

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NOI is the number the whole calculation depends on, and it's built from two pieces most calculators gloss over:

The capex line is the one that trips up even experienced investors. A large, infrequent expense (a roof replacement, a major system overhaul) is a real cost of ownership, but it doesn't belong in the annual NOI used for cap rate — treating it as a reserve set aside separately, rather than an operating expense that lowers this year's NOI, keeps the metric comparable year to year.

A reasonable capex reserve for older properties runs 5-10% of gross rent set aside annually, higher for a property with an aging roof or major systems approaching end of life. That reserve is a real cash-flow planning number worth tracking alongside NOI, even though it stays out of the cap rate formula itself.

The two metrics answer genuinely different questions, and conflating them is a common source of confusion for first-time investors. The cash on cash return calculator builds the levered side in full, with cash invested, year-by-year returns and an exit IRR.

Cap rate is what lets an investor compare a $300,000 property against a $3 million property, or compare deals across buyers who finance differently — it strips financing out entirely. Cash-on-cash return answers the more personal question: given how this specific investor is actually funding this specific deal, what return lands on the money they put in.

Neither number is more "correct" than the other — they're built for different purposes. Cap rate is the right tool for screening and comparing deals quickly; cash-on-cash is the right tool for deciding whether a specific financing structure on a specific deal actually makes sense for the cash being committed. Using cap rate alone to evaluate a heavily-leveraged purchase, or cash-on-cash alone to compare unrelated deals with different financing, both lead to comparisons that look rigorous but aren't actually apples-to-apples.

Leverage amplifies whatever direction the deal is already headed — it can push cash-on-cash return meaningfully above cap rate, or crater it well below, depending entirely on the spread between the property's return and the cost of the debt used to buy it.

Take a $300,000 property with $19,500 in NOI — a 6.5% cap rate. Financed with $75,000 down and $14,400 in annual debt service, annual cash flow is $19,500 − $14,400 = $5,100, on $75,000 invested — a 6.8% cash-on-cash return, slightly above the unlevered cap rate. This is positive leverage: the effective cost of the debt sits below the property's return, so borrowing amplifies the return on the cash actually invested.

Now hold the same property, same $19,500 NOI, same 6.5% cap rate, but assume rates rose and annual debt service is $18,000 instead of $14,400. Annual cash flow drops to $19,500 − $18,000 = $1,500, and cash-on-cash return falls to $1,500 ÷ $75,000 = 2.0% — well below the still-unchanged 6.5% cap rate. This is negative leverage: the cost of debt now exceeds the property's unlevered return, so borrowing works against the investor even though nothing about the property itself changed.

The lesson generalizes beyond this one example: leverage is only favorable when the effective interest rate on the debt sits below the property's cap rate. When rates rise faster than cap rates adjust — which is exactly what happened across much of the market in recent rate cycles — deals that penciled out with strong positive leverage a few years earlier can flip to negative leverage on the same property at the same price, purely because the cost of borrowing changed. A deal that only works with favorable financing assumptions is a deal worth stress-testing against a higher-rate scenario before committing.

Cap rate and DSCR both start from the same NOI figure, but they answer completely different questions for two different audiences. Cap rate tells an investor what return the property generates. DSCR tells a lender whether that income comfortably covers the specific loan being requested — a coverage cushion, not a return at all.

Using the same $19,500 NOI from above: at $14,400 in annual debt service, DSCR = $19,500 ÷ $14,400 = 1.35× — comfortably above the common 1.25× lender minimum. In the higher-rate scenario from the leverage section, where annual debt service rose to $18,000, DSCR falls to $19,500 ÷ $18,000 = 1.08× — below that 1.25× threshold, meaning a lender would likely decline the loan at that rate even though the property's cap rate is unchanged at 6.5%.

That's the practical takeaway: a property can look identical on a cap rate basis while being financeable at one rate environment and not financeable at another. For the full DSCR mechanics — including how lenders calculate it from a tax return and what a longer amortization does to the ratio — see the DSCR calculator.

Running both numbers before making an offer, not just cap rate alone, is what separates a deal that's theoretically attractive from one that's actually financeable at the terms available today. A property with an appealing cap rate that fails a lender's DSCR test at current rates either needs a larger down payment to reduce the loan amount, a longer amortization to lower the payment, or simply isn't buyable on debt at that price in this rate environment — three very different next steps that only the DSCR side of the calculation reveals. Checking both together, ideally before an offer is written rather than after a lender declines the loan, saves the wasted time of pursuing a deal that was never financeable at the intended terms.

Cap rate works in both directions. Given a target return, the same formula solved for price answers a real negotiating question: the maximum an investor should pay to hit their required return on a property with known NOI.

The $300,000 property from the worked example above, with its $19,500 NOI, is listed at a price implying a 6.5% cap rate. An investor who requires a 7% minimum return calculates their ceiling: $19,500 ÷ 0.07 = $278,571, roughly $278,600. Anything above that price fails to hit their target return regardless of how attractive the property looks otherwise — turning a subjective negotiation into a specific number to defend.

The same formula runs equally well in the other direction, which is useful during due diligence rather than just at the offer stage. Given a purchase price already under contract, dividing NOI by that price shows the actual cap rate being paid — a sanity check against a seller's marketing materials, which sometimes quote a cap rate built from pro forma income rather than trailing actuals. Recomputing it from verified trailing twelve-month numbers before closing catches the gap between an optimistic listing and the property's real performance.

Running the same property as a short-term rental instead of a long-term lease changes both sides of the NOI calculation, not just the top line. Gross income potential is typically much higher, but so is the expense ratio — the two don't move in the same proportion.

The same property might generate $54,000 a year in gross short-term rental income against a 65% average occupancy assumption, nearly double the $30,000 long-term rent. But operating expenses rise sharply too: cleaning between stays, platform fees (commonly around 3% on top of guest-paid fees), a furniture and appliance reserve, and property management typically running 20-25% of revenue rather than the 8-10% common for long-term rentals. Total operating expenses of roughly $27,000 against $54,000 in gross income still nets a $27,000 NOI — a 9.0% cap rate, notably higher than the 6.5% long-term-rental cap rate on the identical property.

That higher cap rate isn't free — it comes with real income volatility across seasons, more active management, and regulatory risk in markets that restrict or periodically reconsider short-term rental permits. Comparing a short-term rental cap rate directly against a long-term rental cap rate without accounting for that added risk and operational intensity is comparing two different risk profiles as if they were the same number.

The occupancy assumption is also doing more work in a short-term rental NOI calculation than it does in a long-term one, and it's worth stress-testing. A long-term rental's vacancy assumption is typically a modest single-digit percentage; a short-term rental's effective occupancy can swing 15-20 percentage points between a strong and a weak season, and a NOI built on a single blended annual occupancy figure can mask a property that's comfortably profitable in peak months and running at a loss in the off-season. Modeling seasonal occupancy separately, rather than one flat annual assumption, gives a more honest picture of a short-term rental's actual cash-flow risk.

There's no universal answer — cap rate is a risk signal as much as a return figure, and commonly cited ranges reflect that trade-off:

A cap rate significantly above the local market average for a comparable property is a signal to investigate why, not a reason to celebrate a better deal — deferred maintenance, a difficult tenant base, or a declining submarket are common explanations for an outsized number.

The most reliable way to judge whether a specific cap rate is good isn't against these general bands at all — it's against comparable properties that have actually sold recently in the same submarket. Two identical buildings a mile apart can trade at meaningfully different cap rates if one sits in a school district or amenity zone the market prices differently, which is exactly the kind of local detail a generic risk-tier table can't capture. Local brokers and recent comparable sales data are the more reliable source for that number than any generic industry benchmark, this one included.

Run your own numbers above, free, or check whether a property's income covers a specific loan on the DSCR calculator.