Capitalization rate: Reading a Cap Rate Without Mixing in Financing
The capitalization rate compares net operating income with property value. It evaluates operating income relative to price before considering how the purchase is financed.
Use the Capitalization rate Calculator to enter your own figures and compare the result with the worked example below.
Capitalization rate formula
Cap rate = Net operating income ÷ Property value
Worked example
| Item | Example value |
|---|---|
| Net operating income | 18000 USD |
| Property value | 300000 USD |
| Capitalization rate | 6% |
These are illustrative inputs, not current prices, rates or recommended targets. Where a currency is shown, keep all comparable money amounts in the same currency; conversion examples identify the two sides separately.
How to interpret the result
NOI and property value must be defined consistently. A cap rate is not an all-in personal investment return.
Related calculations
Method and further reading
The example follows the FinMathly calculator method. For broader background, see CFPB: Building a budget. The background resource may use jurisdiction-specific terms; it does not replace the assumptions of this calculator.
Featured photograph: Pexels.