Published 2025-12-26 · Last updated 2026-02-23 · Reviewed by Valzura Editorial Team
Cap Rate Calculator
Price income-producing property or business earnings with a single rate.
The capitalization rate (cap rate) is a property's or business's annual net operating income divided by its price or value, expressed as a percentage. It tells you the unleveraged annual return the income stream produces at that price: a property earning 90,000 dollars of net operating income priced at 1.2 million dollars has a 7.5 percent cap rate. Because the math also works in reverse, dividing income by a market cap rate is a quick way to estimate value.
Annual income minus operating expenses, before any debt service.
The asking price, purchase price, or current market value.
Capitalization Rate
7.50%
The unleveraged annual return the income produces at this price.
The cap rate formula, forward and in reverse
Value = Net operating income ÷ Cap rate
Net operating income is the annual income left after operating expenses but before any loan payments, depreciation, or income taxes. Divide it by the price and you get the return the income produces; divide it by a market rate instead and you get what the income stream is worth. The second form is the workhorse: appraisers pull the capitalization rate from comparable sales, then apply it to the subject's income to estimate value in one step.
A worked example in real estate and in business
A rental property producing 90,000 dollars of net operating income priced at 1.2 million dollars carries a 7.5 percent cap rate, which also means the buyer is paying about 13.3 times the income. The identical math values operating companies: a small business generating 150,000 dollars of normalized earnings, capitalized at 25 percent to reflect its higher risk, is worth 600,000 dollars. That 25 percent rate is simply a 4 times EBITDA multiple written as a percentage; every multiple you have ever seen quoted is a cap rate flipped upside down.
What moves a cap rate up or down
Cap rates price risk and growth. Stable, well-located property with credit tenants trades at low rates because its income is nearly bond-like; older buildings, weaker markets, and shorter leases push rates up. The same forces act on businesses: recurring revenue, a diversified customer base, and a management team that runs without the owner justify a lower capitalization rate and therefore a higher value, while customer concentration and owner dependence do the opposite. Growth also lowers the rate a buyer will accept, since they are buying a rising income stream rather than a flat one.
Cap rates, financing, and full valuations
Because net operating income excludes debt service, the cap rate deliberately ignores financing; whether the deal actually supports a loan is a separate test you can run with the debt service coverage ratio calculator. Capitalizing a single year of income also assumes that income is representative. When earnings are growing or uneven, a multi-year discounted cash flow calculator handles the trajectory properly. For an operating company, the cleanest starting point is to estimate your business's value from its earnings using rates and multiples calibrated to your specific industry.
Frequently Asked Questions
Is a higher cap rate better?
A higher cap rate means more income per dollar of price, which is a better return for the buyer, but it usually signals higher risk, weaker growth prospects, or a less desirable asset. Lower cap rates attach to safer, more stable income streams. Buyers generally want higher cap rates; sellers benefit from lower ones.
What is a good cap rate?
Commercial real estate commonly trades between roughly 4 and 10 percent depending on property type, location, and tenant quality. Small businesses capitalize earnings at much higher rates, often 20 to 33 percent, because their income is riskier. That range is simply another way of saying a 3 to 5 times earnings multiple.
How is a cap rate different from an earnings multiple?
They are the same idea flipped. A cap rate divides income by value, while a multiple divides value by income, so each is the reciprocal of the other. A 25 percent capitalization rate equals a 4 times multiple, and a 5 times multiple equals a 20 percent capitalization rate.
Does the cap rate include mortgage payments?
No. Net operating income is calculated before any debt service, so the cap rate measures the unleveraged return, independent of how the buyer finances the purchase. Financing effects show up in other metrics such as cash-on-cash return and the debt service coverage ratio.
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