One of the most important metrics for a rental property’s profitability is the capitalization rate. Thus, a cap rate calculator is a must-have.
Cap rates might seem simple and easy to calculate. However, calculating the cap rate is not that easy at all especially if you compare multiple investment properties to decide which one to buy.
To stay competitive in the real estate investments business in 2022, a cap rate calculator is a necessary tool. Keep reading to learn more about the best cap rate calculator for 2022.
In this article, we will discuss:
- What Is a Cap Rate in Real Estate Investing?
- What Is the Cap Rate Formula?
- How Do You Calculate Cap Rate?
- What Is a Good Cap Rate?
- What Is a Cap Rate Calculator?
- What Does the Best Cap Rate Calculator Do for Investors?
- Where Do You Find the Best Cap Rate Calculator for 2022?
- What Are the Pros and Cons of Using a Cap Rate Calculator for Rental Properties?
- 10 Best Markets for Cap Rate in 2022
- What Are Some Alternatives to the Capitalization Rate in Real Estate?
- Other Frequently Asked Questions
What Is a Cap Rate in Real Estate Investing?
The capitalization rate, or cap rate, is one of the most popular metrics that measure the rate of return on rental properties in real estate investing. Traditionally used for commercial real estate, the cap rate has established itself as a key profitability measurement for residential rentals as well.
Another way to look at the cap rate is to perceive it as a measure of the level of risk that a real estate rental property carries. After all, all investments are associated with some risk. To understand how the cap rate works, let us first discuss the cap rate definition.
Cap rate refers to the ratio of the annual net operating income (NOI) of an investment property to the purchase price or current market value of the house. While some investors prefer to use the sale price of a rental property to calculate the return on investment, others stick to its present market value.
It’s important to note that cap rates do not take into account the way the property is financed. The ratio of cap rate remains the same regardless of whether you purchase the property entirely in cash or by taking out debt or mortgage.
Learn More: What Is Capitalization Rate? Why Is It Important to Real Estate Investors?
What Is the Cap Rate Formula?
The capitalization rate formula is straightforward and easy to understand. It is the ratio of the net operating income to the selling price or the market value of the property. It doesn’t take into consideration whether you take a mortgage loan or pay the property in cash, therefore your debt payments are not factored in.
The cap rate formula is presented in the following mathematical equation:
Cap Rate = Net Operating Income / Sale Price or Current Market Value
The net operating income (NOI) is the difference between the annual gross rental income that the house generates and the costs of owning, managing, and renting out the house. To calculate the NOI accurately, the time when the house is vacant should be accounted for, as this can directly affect the income the investor makes.
Net Operating Income Formula:
NOI = Gross Rental Income – Operating Expenses – Vacancy Expenses
Meanwhile, the sale price, as mentioned, is either the price that the real estate investor paid initially for buying the house. You may also use the current market value of the rental property instead.
How Do You Calculate Cap Rate?
Calculating the cap rate for any rental property is done by simply dividing the NOI by the current market value according to the cap rate formula. The result should be a positive number expressed as a percentage. The higher this number, the better the return on investment. Let’s look at an example to fully comprehend how to calculate the cap rate.
Cap Rate Calculation Example
To understand how to calculate the cap rate, let’s take a look at this example:
Investor A bought Rental Property 1 for $250,000, and he rents it out for $1,000 per month. The cost of managing and operating the rental property is $600 a month, including property tax, property insurance, utilities, and everything else. Investor A is an excellent landlord, so his rental is occupied all the time, leading to a zero vacancy rate.
Step 1: To calculate the capitalization rate of Rental Property 1, first we need to know the net operating income of the house using this formula:
NOI = Annual Gross Rental Income – Annual Operating Expenses – Vacancy Expenses
Based on our example:
Annual Gross Income = Monthly Rental Income x 12 = $1,000 x 12 = $12,000
Annual Operating Expenses = Monthly Operating Expenses x 12 = $600 x 12 = $7,200
Vacancy Expenses = $0
Therefore, the net operating income is as follows:
NOI = $12,000 – $7,200 – $0 = $4,800
Step 2: Use the cap rate formula to calculate the cap rate of Rental Property 1.
Cap Rate = NOI/Current Market Value x 100% = $4,800/$250,000 x 100% = 1.92%
So after a few simple mathematical calculations, we’ve come to the conclusion that the capitalization rate of Rental Property 1 is 1.92%.
Is this a good cap rate? Or is this a bad capitalization rate? Should Investor A have bought this house as an investment?
Read on to find the answers to these real estate investing questions.
What Is a Good Cap Rate?
Most real estate experts agree that a good cap rate ranges between 8% and 12% for both traditional rental properties and Airbnb rentals. This is the perfect balance between the rate of return on a rental property and the level of risk that it brings.
If we look at capitalization rates as a metric of return on investment only, then it is logical to aim for as high a value as possible. After all, investors look for the best way to make money in real estate—and the more money they make, the better.
However, we should not forget that at the same time, cap rates in real estate also measure how much risk is involved in buying and owning a certain investment property. Investors are naturally averse to risks, which implies that lower cap rates are considered acceptable depending on the location.
Another reason to avoid properties with excessively high cap rates is that this might be a sign of poor property management. Sometimes, the capitalization rates are too big because the investor doesn’t spend enough money on maintaining the house. This could result in the need for major fixes, which could cost thousands of dollars and harm the overall return on investment.
Do you now see how properties with high cap rates could indicate a high risk?
Related: What Is a Good Cap Rate for Rental Properties?
Real Estate Issues Most Investors Are Concerned About
Reaching a consensus on most real estate investing issues is hard if not impossible. Some questions that many new (and even seasoned) real estate investors need an answer to include the following:
- Which is better when it comes to real estate investing—out of state or close to home?
- Which property type is the better real estate investment—single-family or multi-family homes?
- Should you invest in long-term rentals or short-term rentals? Which rental strategy provides the highest rental income?
- When gauging a rental property, should you measure its potential returns using the cap rate or the cash on cash return?
- What is a better cap rate return?
Well, for once, real estate professionals have been able to reach an agreement on the last question mentioned above. Most real estate experts agree that the best cap rates for rental properties are in the range of 8% to 12%.
Related: The Ultimate Guide to Real Estate Investing for Beginners
What Is a Cap Rate Calculator?
The cap rate calculator is one of the must-have real estate investment tools in 2022, especially for beginner investors. This is a type of rental property calculator, which calculates cap rates for rental properties quickly and efficiently. It uses the net operating income and the market value of the house to find the property’s rate of return.
Calculating the cap rate of a single rental property that you already own is relatively easy. As a responsible real estate investor, you must keep records of your monthly rental income, recurring operating costs, and vacancy rates.
Keep in mind though that knowing what return on investment your rental property generates is not of much use. It can only help you decide whether to keep the house or try to sell it for immediate income.
Why Is the Cap Rate Calculator Important?
The goal of every real estate investor should be to constantly add new properties to their real estate investment portfolio. Preferably, you should be buying an investment property every two to three years to succeed in real estate. That’s where the cap rate measure becomes particularly useful and handy—in deciding which rental property to buy.
There will be over hundreds of thousands of income property listings in the US housing market, including MLS listings, foreclosures, bank-owned homes, short sales, and off-market properties.
What is even more overwhelming from the perspective of beginner real estate investors is that they are no longer constrained to the parameters of their location. This is because professional long-term and short-term rental property management have made out-of-state real estate investing a feasible option. With this, you can earn rental income from various states.
Can you imagine having to calculate the capitalization rates of even just a few dozen of these houses for sale to choose the best investment property to rent out traditionally or as an Airbnb property?
To say the least, this will be an extremely difficult and time-consuming process.
This is the reason why using the best cap rate calculator in 2022 to help you compute several properties’ cap rates is recommended. Using a cap rate calculator is better than doing manual computation, which is prone to error.
A cap rate calculator is an investment property calculator that will take the property value and perform a rent estimate. It will also determine all operating expenses and ultimately calculate the cap rate, helping you see an overview of the house’s potential income. Not for one but for hundreds of investment properties that you are eyeing.
What Does the Best Cap Rate Calculator Do for Investors?
The best cap rate calculator in 2022 makes the life of real estate investors easier. It turns three months’ worth of research into 15 minutes of work. It works by optimizing real estate market analysis and investment property analysis to provide reliable estimates of the cap rates. Most importantly, it can calculate the cap rates of an unlimited number of rental listings.
All in all, a good cap rate calculator helps investors make profitable real estate investment decisions faster and more confidently, based on big data and reliable figures. If you want to maximize your income from a rental property, it’s crucial to choose a reliable cap rate calculator.
What Information Should a Cap Rate Calculator Provide?
Here are the specific figures and estimates that the best real estate calculator should be able to provide:
Property Price or Current Market Value
The property price, or its current market value, is a crucially important factor for calculating capitalization rates. Since the cap rate does not consider mortgage/debt payments, the property price or market value is the key component that is being compared to the net operating income.
One-time Startup Costs
This should include the following:
- Home inspection
- Closing costs
- Repair costs
- Furniture
These expenses do not factor in the cap rate formula directly. However, they are important information that can help a beginner investor decide whether he/she can afford to buy the property. No matter how good of a return on investment a rental property might offer, if it is beyond your budget, there isn’t much you can do about it.
Let’s have a look at the way Mashvisor’s cap rate calculator shows the cost estimates for this investment property in the M Streets neighborhood of the Dallas real estate market:

Mashvisor’s Cap Rate Calculator: Costs
Recurring Monthly Expenses
This includes (but is not limited to) the following expenses:
- Debt/Mortgage payment
- Property tax
- Property insurance
- Property management
- Rental income taxes
- Property maintenance
- HOA fees (if investing in a condo or a home in an HOA neighborhood)
- Cleaning fees (if investing in a short-term rental)
Most of these figures are needed for calculating the net operating income of a rental property. Some of them might be easy to figure out, such as the rental income tax rates in different cities. However, other costs such as property tax and property maintenance might require deeper research. With a cap rate calculator, you can get all the data that you need right away.
While the method of financing and the mortgage payments do not affect the cap rate as they are not present in the formula, they are still very important factors for an investor. A good cap rate calculator allows a property investment buyer to adjust their method of financing (cash or through debt or a mortgage loan).
If you plan to take on debt through a mortgage to finance the investment, you should be able to set the loan term and other necessary conditions on the calculator. Therefore, the best cap rate calculator should allow the investor to customize the length and type of mortgage to get more personalized and accurate results.
Occupancy Rates and Vacancy Rates
Occupancy rates refer to the ratio of the number of days in a month that the property is occupied versus the times it was listed or advertised for rent. It’s crucial to know the vacancy rates of the property and include the vacancy costs in your capitalization rate calculations. This allows you to get the full picture of the investment, so you can make the most informed, evidence-based real estate investment decision.
Rental Income: Traditional Rental Income and Airbnb Rental Income
Together with the operating expenses, the rental income is one of the crucial factors for calculating NOI.
Cash Flow
The cash flow is similar to the net operating income, but it also includes the monthly mortgage payments for your debt if you purchased the property through a mortgage loan. Remember to always search for positive cash flow properties to invest in, as this is the only way to make money from real estate. A negative cash flow investment property, even for just a month or two, means that you are losing money in real estate. No investor wants that.
Capitalization Rate: Traditional Cap Rate and Airbnb Cap Rate

Mashvisor’s Cap Rate Calculator: Traditional and Airbnb Cap Rate
Obviously, a good cap rate calculator (and not just the best one) should provide a reliable estimate of the capitalization rate that a rental home is expected to generate. In 2022, this number should be based on real estate comps and accurate data.
Cash On Cash Return (Traditional and Airbnb)
Although we are focusing on using cap rates as a measure of return on investment, the best cap rate calculator will also be able to supply real estate investors with a cash on cash return value. The cash on cash return takes into account how the property is financed.
The cash on cash return is a good measure if you take on debt or a loan to purchase the property. It is also a necessary measure that can help investors make educated, confident, and more profitable investment decisions.
Other Information
Furthermore, an investment property calculator needs to provide some qualitative data about the rental property, such as:
- Address of the property
- Property description
- Property type (single-family home, multi-family home, townhouse, condo, or other)
- Lot size
- Year built
- Number of bedrooms
- Number of bathrooms
- Type of heating
- Type of cooling
- Type of listing (MLS listing, foreclosure, bank-owned home, or short sale)

Mashvisor’s Cap Rate Calculator: Property Characteristics
To sum up, the best cap rate calculator in 2022 will be able to tell investors how much money they should have available in order to afford a certain home for sale. It will also help investors figure out the best method of financing for this particular house.
In addition, the best capitalization rate real estate calculator will show them what rate of return to expect. Last but not least, this real estate investing tool will help you choose the optimal rental strategy for each house.
While some investment properties make more money when rented out on a long-term basis, others are more profitable as vacation rentals. It is essential to customize your rental strategy based on the house you are buying in order to maximize your income.
Where to Find the Best Cap Rate Calculator for 2022
The best cap rate calculator in 2022 is Mashvisor’s rental property calculator. It uses rental comps from actual investment properties obtained through neighborhood analysis and predictive analytics. It also uses machine-learning algorithms to calculate the cap rate of any income property in the US housing market.
Mashvisor’s real estate investment tool will provide you with absolutely all the must-have features that we listed above. Whether you are investing in rental properties as traditional rentals or vacation homes, you will be able to find all the real estate analysis that you need.
One of the best things about Mashvisor’s cap rate calculator 2022 is that investors are not limited to the properties for sale listed on the platform. Indeed, they can input the information of any real estate property in the US to get readily available analytics with just a few clicks.
Where Does the Real Estate Data Come from?
Mashvisor’s cap rate calculator gets real estate data from various reliable sources, including the MLS, county offices, government websites, different real estate websites, and Airbnb. This big data is entered into our machine-learning algorithms to calculate cap rates for rental properties all across the US.
No matter how well-developed and sophisticated a capitalization rate calculator is, it is simply useless unless it has the right data and information to evaluate.
Our investment property calculator looks at the rental rates and the occupancy rate (traditional occupancy rate and Airbnb occupancy rate) of comparable rental properties in a neighborhood. This allows us to calculate the metrics by type of house (single-family home, multi-family home, townhouse, or condo) and the number of bedrooms.
This neighborhood analysis is able to produce comparable rental income and the average Airbnb occupancy rate for any investment property in the area. Finally, the cap rate—as well as the cash on cash return—is calculated based on all of the factors above.
Pros and Cons of Using Cap Rate for Rental Properties
The capitalization rate metric has many benefits, but it’s not perfect by any means. If you are a beginner real estate investor, you might be wondering about the pros and cons of using a cap rate over other real estate return on investment measures.
Here are the benefits and drawbacks of using the ratio of capitalization rates as a means to measure returns:
Benefits of Using Cap Rate
- Easy to calculate—all you need to know is the net operating income of the value of the property (you can use either the sale price or current market value)
- Straightforward comparison between a few rental properties
- Used in both commercial and residential real estate investing
Drawbacks of Using Cap Rate
- No consideration of the method of financing:
The major drawback of using the capitalization rate is that it doesn’t factor in the way in which the house is bought: either through cash or with a debt/mortgage loan. It looks at the price of the house or its current market value, but not at how much initial capital the investor has to put down.
- Payments for debt/mortgage are not factored in:
Furthermore, it ignores the monthly mortgage/debt payments when calculating the net operating income. As most new real estate investors have to take on debt through a mortgage loan, relying on the ratio of the capitalization rate alone might be misleading. It can overestimate the actual return on investment that a rental property will generate.
10 Best Markets With High Cap Rates in 2022
Are you planning to invest in rental properties but don’t know where to begin? You can start by checking the best markets with high cap rates in 2022. We’ve listed the best US cities for traditional and Airbnb rentals with good capitalization rates.
Top 5 Locations With High Traditional Cap Rates in 2022
The best locations for traditional rentals are those that have traditional listings of 1,000 or more and a traditional cap rate of 2% or higher. It’s also good to consider the price-to-rent ratio as it tells how likely the residents will rent a house instead of buying one. A higher price-to-rent ratio means that people find it more practical to rent a house, thus, increasing the demand for rental properties.
Based on Mashvisor’s data as of June 2022, the top five cities for traditional cap rate in 2022 are:
1. Fayetteville, NC
- Median Property Price: $231,659
- Average Price per Square Foot: $143
- Number of Traditional Listings: 2,548
- Monthly Traditional Rental Income: $1,185
- Traditional Cap Rate: 3.82%
- Price to Rent Ratio: 16
- Days on Market: 54
- Walk Score: 26
2. Baltimore, MD
- Median Property Price: $430,238
- Average Price per Square Foot: $248
- Number of Traditional Listings: 5,454
- Monthly Traditional Rental Income: $2,021
- Traditional Cap Rate: 3.19%
- Price to Rent Ratio: 18
- Days on Market: 71
- Walk Score: 59
3. Tallahassee, FL
- Median Property Price: $293,290
- Average Price per Square Foot: $178
- Number of Traditional Listings: 1,729
- Monthly Traditional Rental Income: $1,299
- Traditional Cap Rate: 2.99%
- Price to Rent Ratio: 19
- Days on Market: 68
- Walk Score: 30
4. Philadelphia, PA
- Median Property Price: $611,747
- Average Price per Square Foot: $374
- Number of Traditional Listings: 12,067
- Monthly Traditional Rental Income: $1,992
- Traditional Cap Rate: 2.94%
- Price to Rent Ratio: 26
- Days on Market: 95
- Walk Score: 63
5. Norfolk, VA
- Median Property Price: $381,556
- Average Price per Square Foot: $213
- Number of Traditional Listings: 1,121
- Monthly Traditional Rental Income: $1,607
- Traditional Cap Rate: 2.94%
- Price to Rent Ratio: 20
- Days on Market: 46
- Walk Score: 40
Top 5 Locations With High Airbnb Cap Rate in 2022
The best locations for vacation rentals are those that have active Airbnb listings of 1,000 or more and an Airbnb cap rate of 2% or higher. It’s also important to consider the occupancy rates of these Airbnb properties as well as the cities’ walk scores.
Occupancy rates refer to the ratio of the number of days the vacation rentals are booked to the number of days they are listed on the platform. In general, a ratio of more than 50% is acceptable, and the higher the occupancy rates, the better.
Here are the best five cities for Airbnb cap rate in 2022, according to Mashvisor’s data as of June 2022:
1. Jefferson, LA
- Median Property Price: $333,079
- Average Price per Square Foot: $255
- Number of Airbnb Listings: 1,167
- Monthly Airbnb Rental Income: $3,677
- Airbnb Cap Rate: 7.59%
- Airbnb Daily Rate: $230
- Occupancy Rate: 58%
- Days on Market: 20
- Walk Score: 52
2. New Orleans, LA
- Median Property Price: $509,112
- Average Price per Square Foot: $298
- Number of Airbnb Listings: 3,175
- Monthly Airbnb Rental Income: $4,453
- Airbnb Cap Rate: 5.90%
- Airbnb Daily Rate: $260
- Occupancy Rate: 55%
- Days on Market: 60
- Walk Score: 58
3. Tucson, AZ
- Median Property Price: $468,600
- Average Price per Square Foot: $254
- Number of Airbnb Listings: 1,779
- Monthly Airbnb Rental Income: $3,118
- Airbnb Cap Rate: 5.09%
- Airbnb Daily Rate: $121
- Occupancy Rate: 67%
- Days on Market: 57
- Walk Score: 41
4. Albuquerque, NM
- Median Property Price: $382,761
- Average Price per Square Foot: $208
- Number of Airbnb Listings: 1,086
- Monthly Airbnb Rental Income: $2,797
- Airbnb Cap Rate: 4.90%
- Airbnb Daily Rate: $125
- Occupancy Rate: 64%
- Days on Market: 70
- Walk Score: 42
5. Tempe, AZ
- Median Property Price: $661,702
- Average Price per Square Foot: $349
- Number of Airbnb Listings: 1,141
- Monthly Airbnb Rental Income: $4,211
- Airbnb Cap Rate: 4.69%
- Airbnb Daily Rate: $187
- Occupancy Rate: 62%
- Days on Market: 10
- Walk Score: 51
Alternatives to the Capitalization Rate in Real Estate
The most important residential real estate return on investment metrics—besides capitalization rate—include cash on cash return ratio, rate of return, and internal rate of return. As each has its pros and cons, looking at all these measures is the best way to find a positive cash flow property with high profitability.
For instance, the cash on cash return considers how you finance the purchase of the property. If you purchased the property through debt or mortgage, it can affect the value of the ratio of the cash on cash return.
However, the fact that the capitalization rate has a disadvantage doesn’t mean that real estate investors in residential income properties should totally ignore it completely. What this means instead is that the capitalization rate should be used together with the other metrics to measure a property’s rate of return.
Investors should gather as much information and data as possible and perform as much investment property analysis before deciding which property to buy. It’s best to do this using a reliable rental property calculator.
Now you know all that you need to know about the best cap rate calculator in 2022. To start finding income properties with high returns on investment in the US real estate market in 2022, make sure to sign up for Mashvisor and get a 7-day free trial.
Frequently Asked Questions
We have established that calculating the cap rates can help investors determine which rental income property has the highest income potential. Keep in mind that it doesn’t matter whether your plan to buy the property in cash or take on a debt/mortgage loan to finance it.
You may be ready to invest in real estate. But if you still have a few questions in mind, check the following FAQs for more information:
Why Is 8% to 12% a Good Cap Rate?
What makes a cap rate “good” depends on several factors, and these factors may vary from one location to another. Although there is no concrete number for a good cap rate, many real estate professionals agree that a good cap rate ranges from 8% to 12%. However, this does not mean that lower cap rates are not good.
In fact, some investors prefer to invest in properties that have lower cap rates, depending on their risk tolerance. So the 8% to 12% figures are only ballpark figures that serve as a basis for good cap rates. These figures are not set in stone. What makes a cap rate good can vary from one investor to another.
What Does a 7.5% Cap Rate Mean?
A 7.5% cap rate or lower means that a house for investment might be located in an area with a better chance of appreciation. Low cap rates can be related to a high property value, which can be beneficial for investors. Also, remember that maintenance and repair costs may affect the cap rate. This means that properties with lower cap rates might mean that they are well-maintained.
A property with a 7.5% cap rate (or lower) is ideal for investors who want to earn stable passive income. Remember, properties with low cap rates may have lower risks compared to those with high cap rates.
How Is the Cap Rate Related to Risk?
Aside from calculating the ratio of the NOI to the property’s price or market value, cap rates are also used to measure risk. A higher cap rate means the investment could be riskier compared to an income property with a lower cap rate.
In general, an investment with a higher return potential ratio is also associated with higher risks. For example, in a highly-developed real estate market, the population usually keeps rising and inventory remains low. Here, the value of properties will surely increase at a faster rate. A high property value can result in a low cap rate.
However, since the property value appreciates quickly, it means that investing in such a location is less risky. After all, real estate investors will benefit from high appreciation rates. This would mean their properties will increase in value over time.
In contrast, a high cap rate could mean that a property may have a low value. The demand for housing might be low, and the inventory may be high. If the investment is in an area with a small population, no one might rent your property. Thus, sometimes, a high ratio of cap rate is associated with a higher risk.
Do Capitalization Rates Increase With Interest Rates?
Generally, if loan interest rates increase, the ratio of capitalization rates will also increase. When interest rates are low, many people will want to buy a house. This will increase the demand for housing, which can also result in an increase in the value of properties. As mentioned, when the value of homes is high, the cap rate will be low.
On the other hand, if interest rates increase, more people won’t be able to pay for the high loan/debt cost. And thus, they will opt out of buying a new home. When people cannot take on a debt to purchase a property, it can result in low demand for real estate. When the demand is low, more listings will sit in the market for a long time.
Lower demand for housing could affect the value of the properties. When the property value is low, the cap rate will rise. This is because the cap rate is the ratio of the NOI versus the property’s price or current market value.