Cap Rate Calculator
Cap rate is what a rental earns before any mortgage, measured against what it costs to buy. Enter the price, the rent, and what the building costs to run for a year. The number falls out of the bottom. Two people can buy the same house on the same day and share a cap rate while living completely different financial lives, and that is the measure doing its job.
Financing changes nothing about the cap rate. It is a separate question, kept separate on purpose.
Net operating income divided by price. No mortgage in it, by design.
How this is calculated
Four steps, and none of them are hard. The difficulty in a cap rate is never the arithmetic. It is being honest about the inputs.
- 1.Effective gross income = gross annual rent − (gross annual rent × vacancy rate)
- 2.Management fee = effective gross income × your management percentage
- 3. Operating expenses = property tax + insurance + HOA + repairs + capital reserve + owner-paid utilities + management fee + other
- 4.Net operating income = effective gross income − operating expenses
- Cap rate= net operating income ÷ purchase price (or current value), × 100
Every term in those five lines, defined once:
Gross scheduled rent
A full year at your asking rent, every unit, twelve months, before a single deduction. For a nightly rental it is the year of booking revenue you actually expect, net of platform commission, which is a much harder number to know honestly.
Vacancy allowance
The share of that rent you assume never arrives. Turnover weeks, a unit sitting through a slow February, a tenant who leaves in July. It is a percentage because nobody knows which weeks it will be.
Effective gross income
Gross scheduled rent minus the vacancy allowance. The money that lands in the account. Every expense percentage in the calculator is taken against this figure rather than the asking rent, because a fee on rent you never collected is not a real expense.
Operating expenses
Everything the building costs to run whether or not there is a loan on it. Property tax, insurance, HOA dues, repairs, a capital reserve, any utility you carry, the management fee, and whatever else does not fit in those boxes.
Net operating income
Effective gross income minus operating expenses. Often written NOI. It is the property standing on its own, before financing, before depreciation, before your personal tax return gets involved.
Capitalization rate
Net operating income divided by the price, expressed as a percentage. Appraisers call it the overall rate. It converts an income stream into a value, which is the reason buyers care about it at all.
What is deliberately missing
Your mortgage payment is not in there. Neither is depreciation, your own income tax, or the closing costs from the purchase. That is not an oversight in the formula. Cap rate exists to compare buildings, and financing belongs to the buyer rather than the building. The moment you subtract a loan payment, your number stops being comparable to anybody else’s.
Your tax return and your cap rate disagree on purpose, and both are right. The IRS lists mortgage interest as a deductible rental expense in Publication 527, because a tax return measures what you personally earned. A cap rate measures what the property earned. Same house, two questions, two answers.
A worked example, with invented numbers
These figures are made up. I picked them so the arithmetic is easy to follow, and they describe no real home, no real market and no real owner. Use your own.
| Purchase price | $500,000 |
| Gross annual rent | $36,000 |
| Vacancy allowance at 5% | −$1,800 |
| Effective gross income | $34,200 |
| Property tax | $3,500 |
| Insurance | $1,400 |
| Repairs and maintenance | $2,000 |
| Capital reserve | $1,800 |
| Owner-paid utilities | $600 |
| Other | $400 |
| Total operating expenses | $9,700 |
| Net operating income | $24,500 |
| Cap rate | 4.90% |
The management fee sits at zero in that table, on purpose. The only honest number in that box is the one on your own agreement, so the calculator ships it empty and this page will not fill it in for you. Type any percentage into the tool and watch two things move together: the expense line goes up, the cap rate comes down. That is arithmetic, not an argument for or against hiring anybody.
Add financing and a second number appears. Say the buyer put in $130,000 of cash and pays $19,000 a year in principal and interest, still invented. Cash flow is $24,500 minus $19,000, or $5,500. Cash-on-cash return is $5,500 divided by $130,000, which is 4.23%. The cap rate did not move, because nothing about the building changed.
What owners get wrong
Five mistakes, in the order I see them. The first one is the most common and the most expensive.
Putting the mortgage in the expense list
This is the big one, and it is not a rounding error. A mortgage payment is what your financing costs, not what the building costs. Two buyers of the same house on the same day have the same cap rate and wildly different cash flow, and that is the measure working correctly rather than failing. If you subtract debt service before dividing, you have not calculated a cap rate. You have calculated something with no name that cannot be compared to anything.
Leaving vacancy at zero
A property that has been full for three years still turns over eventually, and the month it does costs you rent plus a make-ready. Owners who model a hundred percent occupancy are not forecasting. They are describing the past and hoping. Put a real allowance in, then look at the number again.
No capital reserve
Roofs, furnaces, water heaters, flooring and appliances all fail on a schedule you do not control. IRS Publication 527 draws the same line the reserve does: a repair can generally be deducted, but an expense that betters, restores or adapts the property has to be capitalized. Pretending a new roof is a maintenance ticket does not work on your tax return and it should not work on your cap rate either.
Running the rate on a price that no longer exists
A cap rate on what you paid in 2016 and a cap rate on what the home is worth now are two different measurements with the same name. The first grades the purchase. The second grades holding on. In Nevada the caps hold your annual bill down over time, so a long-held home often carries a property tax figure a new buyer will never see. In California a sale resets it outright. Rerun the tax line whenever you switch which price you are dividing by.
Comparing your number to one from the internet
Cap rates are extracted from actual transactions in a specific market, which is why Freddie Mac's appraisal guidance calls comparable sales the preferred way to derive one whenever those sales exist. A rate that reads as strong for a Reno fourplex may read as weak for a lakefront home in Incline Village, and neither of those is settled by an article. Get comps from an agent who works your streets. That is the whole answer.
That last one has a source worth reading if you ever argue about it. Freddie Mac’s appraisal guidance on capitalization rates quotes the Appraisal Institute directly: deriving rates from comparable sales is the preferred technique where sales of similar, competitive properties are available. That guidance is written for multifamily lending rather than for a single rental house, so treat it as the principle and not as a rule that binds your duplex. The principle still holds. A rate means what the local sales say it means.
Where the property tax line actually comes from
Guessing at property tax is the fastest way to a wrong cap rate, and the two sides of the state line do not work the same way. In Nevada the assessor states it plainly: taxable value is assessed at 35 percent, and your bill is that assessed value multiplied by the district rate. On top of that, Washoe County applies a partial abatement that caps the increase on a primary residence at 3 percent a year, with a higher cap on other property. The county notes that some rental dwellings can qualify for the 3 percent cap as well, so check whether yours does rather than assuming either way.
California works from the other direction. Under Proposition 13, as Placer County describes it, the rate is limited to 1 percent plus voter-approved bonds, the base year value rises by no more than 2 percent a year, and a change of ownership resets the assessed value to market. So a Truckee or Tahoe City owner ten years in has a tax bill a buyer will never inherit. If you are modelling what someone else would pay for your home, model their tax bill and not yours. None of this is tax advice, and I am not your CPA.
Short-term rentals need a different set of inputs
The formula does not change for a vacation rental, but almost every number going into it does. Gross rent becomes booking revenue after platform commission, and it is seasonal rather than flat. The expense side gets heavier: cleaning between stays, linens and consumables, higher utilities, permit fees, and a maintenance load that scales with turnovers rather than with months. Lodging tax is charged on top of the guest’s rate and passed through to the jurisdiction, so it belongs in neither the income nor the expense column. Who actually sends it depends on where the home sits and which platform booked the stay, and the answer is not the same in Reno as it is in Truckee — we set out who collects lodging tax across Reno and Tahoe separately. Our breakdown of what a Tahoe vacation rental actually costs to run is the place to build that expense list before you bring it back here.
If you are still deciding which way to run the property, the cap rate is only half the comparison. Read the short-term versus long-term comparison for Reno alongside the long-term rental market guide for landlords, then run this calculator twice with the rent and expense assumptions each model implies. Doing it twice takes ten minutes and tends to settle the argument.
Before you trust the number
Pull the real property tax bill. Put a vacancy allowance in even if last year was full. Fund a capital reserve. Use your own management percentage rather than a figure from anywhere else. Then ask an agent for comparable sales, because a cap rate with nothing to compare it to is a number rather than an answer.
Frequently Asked Questions
What is a good cap rate for a rental property in Reno or Tahoe?
There is no honest single answer, and anyone who hands you one without looking at your street is guessing. A cap rate only means something next to what comparable properties in your own submarket actually sold for. Freddie Mac's appraisal guidance quotes the Appraisal Institute on the point: deriving capitalization rates from comparable sales is the preferred technique when there is enough information about sales of similar, competitive properties. A number pulled from a national article describes a different market than yours. Ask a local agent to pull recent sales of similar buildings and work the rate backwards from the price and the income. We publish no target figure for Reno or Tahoe, because we would be inventing it.
Does the cap rate include my mortgage payment?
No, and that is the point of the measure rather than a gap in it. Cap rate describes the property: what it earns after the cost of running it, against what it is worth. Financing describes you. Two people can buy the same duplex on the same afternoon, one paying cash and one borrowing most of it, and they own an identical cap rate with completely different bank balances. So the mortgage stays out of the operating expense list. The number that does include it is cash-on-cash return, and this calculator will show that too once you open the financing section.
Should I use the purchase price or the current market value?
Both, on separate runs, because they answer different questions. The rate on your purchase price tells you how the deal you signed is performing. The rate on today's value tells you what your equity is earning where it currently sits, which is the question that decides whether to hold or sell. On the California side the gap is wider than owners expect: a sale resets the assessed value to market under Proposition 13, so a buyer inherits a tax bill that looks nothing like yours. Rerun the property tax line before you quote a cap rate to anyone as a selling point.
What is the difference between cap rate and cash-on-cash return?
Cap rate is net operating income divided by the price of the property. Cash-on-cash is the cash left over after the mortgage, divided by the cash you actually put in. One compares this building to other buildings regardless of who owns it. The other compares this deal to whatever else you could have done with that down payment. A heavily financed property can show a strong cash-on-cash return and an ordinary cap rate at the same time, which is not a contradiction. They are measuring two different things: the asset, and your position in the asset.
Want the Expense Side Filled In Properly?
Most cap rates go wrong on the expense line rather than the rent line. We run long-term rentals across Reno, Sparks and the Tahoe basin, and a property-specific analysis gives you real numbers for your own home instead of averages. Ask for one and you get a written quote rather than a rate card.
See Long-Term ManagementRunning the home nightly instead? Short-term management covers the other model.