How to Calculate a Cap Rate (and What a Good One Looks Like)

The cap rate is the first number anyone quotes on a deal — and the most commonly bent. Here's how to calculate it correctly and how to judge whether the result is any good.

The formula

Cap rate = NOI ÷ price. A property with $60,000 of net operating income at a $1,000,000 price trades at a 6.0% cap rate. That's it — the arithmetic is trivial. The judgment is entirely in the NOI.

Which NOI to use

Cap rate is only as honest as the NOI behind it. Build NOI on real economics:

• Effective gross income — gross potential rent minus vacancy and credit loss, plus other income.
• minus actual operating expenses — taxes, insurance, management, maintenance, utilities, and the landlord's real costs (not a stylized expense ratio).
• minus replacement reserves — the capital you must set aside for roofs, systems, surfacing, and turnover.

The trap: brokers usually present NOI before reserves and sometimes before real landlord costs. That raises NOI, which raises the cap, which makes the price look cheaper. Always strip it back to the number you'll actually keep — see operating reserves and NOI.

Calculate it both ways: broker cap vs true cap

Run two caps against the same price:

• Broker cap = headline (gross, pre-reserves) NOI ÷ price.
• True cap = NOI after real expenses and reserves ÷ price.

The broker number is always higher. Underwrite to the true cap; quote the broker cap only to know what you're negotiating against. The gap — often 20–80 basis points — is where the asking price gets justified. The full mechanic is in Broker Cap vs True Cap, and the cap-rate calculator shows both side by side with a broker-vs-true toggle.

What "good" looks like

A cap rate is meaningful only in context. Three lenses:

1. Asset class. Stabilized multifamily and modern logistics in primary markets trade at the lowest caps (highest prices). Industrial outdoor storage, secondary-market retail, and shorter-WALT single-tenant deals trade higher.
2. Rate environment. Cap rates move with the cost of debt. A 6% cap looks very different when the 10-year Treasury is 1.5% versus 4.5% — the spread to your borrowing rate is what determines whether leverage is accretive.
3. Comparables. The only reliable benchmark is what similar assets actually traded for recently in the same submarket. A cap rate without comps is a number without a verdict.

A quick sanity check: if your going-in cap rate is at or below your interest rate, you have negative leverage going in — the deal only works if NOI grows or you exit at a tighter cap. That's a thesis, not a given.

Worked example

A $5,000,000 industrial deal with $300,000 of headline NOI shows a 6.0% broker cap. Back out $25,000 of reserves and $5,000 of real landlord costs the OM omitted, and true NOI is $270,000 — a 5.4% true cap. If your target going-in yield is 6.0%, the price that actually delivers it is $270,000 ÷ 6.0% = $4,500,000. That $500,000 gap is the negotiation.

Set your target cap once and UpsideIQ grades every deal against it — broker cap and true cap shown side by side, reserves and real expenses done right. Try the free cap-rate calculator.