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Cap Rate & Yield-on-Cost

Institutional-grade investment analysis for real estate professionals.

Quick Fill:
CAP --%
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NOI $0
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CoC --%
•
DSCR --
--
ACQUISITION
$
%
Closing: $0
Down Pmt: $0
Total Cash: $0
DEBT
%
%
yr
yr
Loan: $0
P&I: $0
INCOME
$
$
%
EGI: $0
Cash Flow: $0
EXPENSES $/YR
$
$
$
$
%
$1,500
%
$2,400
GRM
--
Gross Rent Multiplier
Break-Even Occ.
--%
Min occupancy to cover all costs
Yield-on-Cost
--%
NOI / (Price + Closing)
Expense Ratio
--%
Operating expenses / EGI
Monthly CF
$--
After debt service
Price-to-Rent
--×
Price / Annual rent
NOI = $0 − $0 = $0 | Cap Rate = --%
MARKET CONTEXT
Core4–5%
Value-Add5–7%
Opportunistic7%+
Chart: cash-on-cash sensitivity.

Cash-on-Cash Sensitivity

Purchase Price vs Interest Rate

%
MAXIMUM OFFER (MAO) $0
Fairly Priced

Bear / Base / Bull Scenarios

Bull: vacancy −2%, rent +10%, rate −0.5%  |  Bear: vacancy +5%, rent −10%, rate +0.5%

Break-Even Rent Calculator

What minimum monthly rent achieves your target cap rate at the current purchase price?

%
→
MIN MONTHLY RENT
$0
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Hold Period Returns

Projected returns based on appreciation and current cash flow.

%
10 yrs
%
%
%
Chart: cap rate & yield-on-cost.
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How to Use This Calculator

1

Acquisition Modeling

Enter the property purchase price, closing costs, and loan-to-value ratio. This establishes your initial basis and total cash outlay.

2

Operational Inputs

Input gross rental income and all operating expenses. The calculator automatically computes your Net Operating Income (NOI).

3

Analyze the Metrics

Review Cap Rate vs. Cash-on-Cash return. Use the Scenario Analysis tab to see how interest rate shifts impact your actual yield.

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Frequently Asked Questions

Strategy Cap Rate vs Cash-on-Cash Return
Cap Rate measures the unleveraged profitability of a property. Cash-on-Cash (CoC) measures the actual return on your down payment after paying the mortgage debt service.
Advanced Why is my CoC lower than the Cap Rate?
This is known as "negative leverage." If your mortgage interest rate is significantly higher than the property's cap rate, the debt is eroding your equity returns.
Basics How is Net Operating Income (NOI) calculated?
NOI is calculated as: Gross Operating Income (Rent + Other) minus Vacancy and all Operating Expenses. It specifically excludes mortgage payments and depreciation.
Advanced What DSCR do lenders typically require?
The Debt Service Coverage Ratio (DSCR) should usually be 1.25x or higher. This means the property generates 25% more NOI than the annual mortgage payment.
Basics Going-in vs. Exit Cap Rate — what's the difference?
The going-in cap rate is the yield at purchase based on current NOI. The exit cap rate is the projected yield at the time of sale. Investors often assume a slightly higher (expanded) exit cap to be conservative, which lowers the projected sale price.
Strategy Does cap rate include closing costs?
Strictly, cap rate uses only the purchase price. Many investors use Yield-on-Cost instead, which divides NOI by total acquisition cost (price + closing costs + initial repairs). Yield-on-Cost gives a more realistic picture of your true unleveraged return.
Advanced What are operating expenses?
Operating expenses include property taxes, insurance, maintenance & repairs, property management fees, HOA dues, and reserves for capital expenditures (CapEx). They do NOT include mortgage payments, depreciation, or income taxes. A common benchmark is the 50% rule: expenses often run 40–55% of gross income.
Strategy What is a "good" cap rate?
A "good" cap rate depends on asset class, location, and your risk tolerance. Core assets in gateway markets trade at 4–5%; value-add deals typically yield 5–7%; opportunistic or secondary-market properties often exceed 7%. Higher cap rates signal higher risk or a more hands-on management requirement — not a free lunch.
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Formula & Methodology

Cap Rate

Cap Rate = NOI / Purchase Price × 100

The unleveraged return on a property. Higher cap rates indicate higher return but typically more risk.

Net Operating Income (NOI)

NOI = Gross Income − Vacancy − Operating Expenses

NOI excludes mortgage payments, depreciation, and capital expenditures from the calculation.

Cash-on-Cash Return

CoC = (NOI − Annual Debt Service) / Total Cash Invested × 100

Measures the actual return on your cash after paying the mortgage. Reflects the impact of leverage.

Debt Service Coverage Ratio

DSCR = NOI / Annual Debt Service

Lenders require DSCR ≥ 1.25x. Below 1.0x means the property cannot cover its mortgage from income alone.

About this calculation · Accuracy & Methodology

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Key Terms Explained

Cap Rate Capitalization Rate — the ratio of NOI to property value. Used to compare properties regardless of financing structure.
NOI Net Operating Income — gross rental income minus vacancy loss and all operating expenses, before debt service.
Cash-on-Cash (CoC) The annual pre-tax cash flow divided by the total cash invested (down payment + closing costs). Reflects actual leveraged returns.
DSCR Debt Service Coverage Ratio — measures how many times the NOI can cover the annual mortgage payment. A key metric for lenders.
LTV (Loan-to-Value) The percentage of the purchase price financed by the mortgage. Higher LTV means more leverage but also more risk.
Yield-on-Cost NOI divided by total acquisition cost (price + closing + repairs). A more conservative measure than standard cap rate.
Effective Gross Income (EGI) Gross potential rent plus other income, minus vacancy and collection losses. The realistic top-line revenue.
GRM (Gross Rent Multiplier) Purchase price divided by annual gross rent. Lower GRM suggests better value; typical range is 8–15×.
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Real-World Examples

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Alex

Example 1: Single-Family Rental

Scenario: Purchase price $300,000, monthly rent $2,500, 5% vacancy, $9,200/year expenses.

Gross Income: $2,500 × 12 = $30,000

EGI: $30,000 × (1 − 0.05) = $28,500

NOI: $28,500 − $9,200 = $19,300

Cap Rate: $19,300 / $300,000 = 6.43%

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Cap Rate by Property Type

Property Type Typical Cap Rate Risk Level Typical Vacancy Notes
Class A Multifamily4.0 – 5.5%Low3-5%Core urban locations, new construction
Class B Multifamily5.5 – 7.0%Medium5-8%Value-add opportunities, suburban
Single-Family Rental5.0 – 8.0%Medium5-10%Varies widely by market
Retail / Strip Mall6.0 – 9.0%Medium-High5-15%Tenant quality critical
Industrial / Warehouse5.0 – 7.5%Low-Medium3-7%Growing demand, long leases
Office6.0 – 10.0%High10-25%Remote work impact, market dependent
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Understanding Cap Rate in Real Estate Investing

What Cap Rate Really Tells You

The capitalization rate is the most widely used metric in commercial real estate for comparing investment properties. It strips away financing variables to show the pure, unleveraged yield of a property based on its net operating income relative to its price. A property with a 6% cap rate generates $6 of NOI for every $100 of value. This simplicity makes cap rates invaluable for quick comparisons across different properties, markets, and asset classes.

Cap Rate vs Cash-on-Cash: When to Use Each

Cap rate and cash-on-cash return answer different questions. Cap rate tells you about the property's intrinsic yield regardless of how it is financed. Cash-on-cash tells you what return your actual invested dollars are earning after debt service. In a low-interest-rate environment where mortgage rates are below the cap rate (positive leverage), CoC will exceed the cap rate. When rates rise above the cap rate (negative leverage), CoC drops below it — sometimes dramatically. Savvy investors track both metrics to understand their true risk exposure.

The Role of DSCR in Deal Analysis

The Debt Service Coverage Ratio is a critical metric for both investors and lenders. A DSCR of 1.25x means the property generates 25% more income than needed to cover the mortgage — providing a safety cushion for vacancies or unexpected expenses. Most commercial lenders require a minimum DSCR of 1.20 to 1.25. Properties with lower ratios may still be viable investments, but they carry more risk if income dips even slightly.

Using Target Analysis for Acquisitions

The reverse-engineering approach — setting a target cap rate and calculating the maximum offer price — is how institutional investors structure their bids. By determining the price at which a property meets their minimum return threshold, buyers can negotiate with confidence. If the asking price implies a 5% cap rate but your target is 7%, you know exactly how much discount you need. This mathematical approach removes emotion from negotiation and keeps acquisitions disciplined.