JB PARCELCap Rate Calculator
Cap rate is net operating income divided by price, with financing left out entirely. It is how income property gets valued and compared, and it works backwards to tell you what a building is worth.
How this calculator works
Cap rate equals net operating income divided by value. NOI is everything the property collects after vacancy, minus every expense of operating it, and nothing else. No mortgage, no depreciation, no capital improvements, no income taxes. Strip financing out and two buildings become comparable even when one is all cash and the other is leveraged to the ceiling.
Run it forwards to price a deal you are looking at. Run it backwards to value one you own: take your NOI, divide by the cap rate similar buildings are trading at, and you have your value. That is also the mechanism behind commercial value-add. Add $20,000 of annual NOI in a six percent cap market and you created $333,000 of value, regardless of what you spent to get it.
The expense ratio output is your reality check. Most small multifamily runs 35 to 50 percent of effective gross income. If your number comes in at 22 percent, something is missing, usually management, reserves, or the fact that the seller was deferring maintenance.
Two cap rates worth keeping straight. Going-in cap rate uses the trailing or in-place income at your purchase price. Stabilized cap rate uses what the property will produce after your plan is executed. Sellers quote whichever is higher. Ask which one you are looking at.
Worked example: a four-unit in East Nashville
Four units at $1,100 each, $415,000 asking, with real expenses instead of the seller's version.
| Gross scheduled rent | $52,800 |
|---|---|
| Less 5% vacancy | $50,160 |
| Taxes, insurance, utilities | $10,300 |
| Management at 8% | $4,013 |
| Maintenance, reserves, and everything else | $7,700 |
| NOI | $28,147 |
| Cap rate | 6.78% |
The listing said 12.7 percent, because the listing divided gross rent by price and called it a day. At a 6.5 percent market cap the real income supports $433,031, so the ask is defensible. But the number that sells the deal and the number that underwrites it were almost two to one apart.
Questions investors ask
What is a good cap rate?
It depends entirely on the market and the asset. In Tennessee metros, stabilized small multifamily has generally traded in the five to seven percent range, class C and rural product higher, prime single-tenant net lease lower. A high cap rate is not automatically a better deal, it is compensation for risk: worse location, shorter lease term, weaker tenant, or deferred maintenance you are inheriting.
Does cap rate include the mortgage?
No, and that is the point. Cap rate measures the property. Two buyers with different loans see the same cap rate on the same building. If you want the number that includes your financing, use cash-on-cash return or IRR.
Why is the seller's cap rate always higher than mine?
Because sellers use gross rent with no vacancy, no management fee, no capital reserve, and often the current tax bill rather than the reassessed one you will get after closing. Rebuild the operating statement from scratch with your own assumptions. Ask for two years of actual bank statements, not a pro forma.
How do I find the market cap rate for my area?
Ask a commercial broker who closes in that submarket and asset class, they track it and will usually share. Cross-check against recent sales: pull comparable buildings on the parcel map, look at what they actually sold for, and back into the cap rate from their income. Published national surveys are too broad to price a four-unit in Chattanooga.
Can I use cap rate on a single-family rental?
You can compute it, and it is useful for comparing one rental to another. But single-family values are set by residential comparable sales, not by income, so a low cap rate on a house in a strong neighborhood tells you about the neighborhood rather than about a bad deal. Cap rate drives value on commercial and on five-plus unit multifamily, where the appraisal itself is income-based.
Related calculators
Screening a real property? Pull its appraised value, assessed value, acreage, land use, and last recorded sale off the JB PARCEL parcel map and drop the real numbers into this calculator instead of guessing. Coverage runs across every county we carry.