Cap Rate Calculator: Formula and Worked Example
1. Short answer
The capitalisation rate is one year of net operating income divided by the market value of the property, expressed as a percentage. It is the standard way investment property is quoted in the United States and the United Kingdom.
Cap rate = (NOI ÷ market value) × 100%
A property with an NOI of € 11,074 and a market value of € 300,000 has a cap rate of 3.69%. Watch the denominator: it is what the asset is worth, not what you paid for it.
2. What cap rate is, and what it is not
Cap rate answers one question: what does this asset yield as a holding, independent of how it was bought or financed. That is why the denominator is market value. Two investors who own the same building on the same day have the same cap rate, whether one paid cash and the other borrowed 80%, and whether one bought five years earlier than the other.
That is exactly what separates it from the Dutch netto aanvangsrendement, or net initial yield. Net initial yield divides the same NOI by total investment: purchase price plus transfer tax, acquisition costs and initial works. It is your return on your purchase. Cap rate is the asset's return in today's market.
What it does not include:
- no financing: interest and principal do not appear
- no tax
- no capital growth
- no acquisition costs, because those sit in your purchase and not in the market value
- no depreciation
The formula travels well; the conventions do not. A US cap rate almost always deducts a vacancy allowance and usually a reserve for capital expenditure. A yield quoted in the Dutch market is often published without either. Two percentages side by side therefore mean nothing until you know which items were taken off the rent.
What BRIX Calc does. The rental calculator runs the cap rate on the post-renovation market value, so on the value the property has once it is in operation. Net initial yield runs on total investment. With no market value entered there is no denominator and no cap rate: the report omits the cell rather than printing a zero.
3. The formula, component by component
Numerator: NOI. Annual gross rent less that year's operating costs. In BRIX Calc that means service charges, utilities, a maintenance reserve and insurance (monthly figures, times twelve), plus property tax, ground rent, management fee and any operating items you add yourself (annual figures). Interest and principal do not belong in it. See the NOI page for the full boundary.
Denominator: market value. What the property is worth today, not your purchase price and not your total investment. On a purchase at market value the two coincide for a moment; buy below value, buy above value or simply hold for a while, and they part company.
That gap is not a detail. A property bought five years ago for € 220,000 that is now worth € 300,000 has a cap rate on € 300,000. Your personal return on the old price is far higher, but that is a different number with a different name.
4. Worked example
The same renovated 75 m² apartment that runs through the other metric pages, bought as an investment in 2026 and let on the open market. Figures in euros, on Dutch rules.
| Item | Amount |
|---|---|
| Base rent per month | € 1,475 |
| Annual rent | € 17,700 |
| Operating costs per year | € 6,626 |
| NOI | € 11,074 |
| Purchase price | € 285,000 |
| Transfer tax, acquisition costs and initial works | € 44,740 |
| Total investment | € 329,740 |
| Post-renovation market value | € 300,000 |
Cap rate = (11,074 ÷ 300,000) × 100% = 3.69%
| Metric | Value | What it means |
|---|---|---|
| Cap rate | 3.69% | NOI against market value: what the asset yields as a holding |
| Net initial yield | 3.36% | The same NOI against what you actually paid |
| Gross yield | 5.37% | Gross rent against total investment, before any cost |
| Gap between cap rate and net yield | 0.33 points | The acquisition costs, which sit only in the net yield denominator |
Cap rate and net initial yield share their numerator exactly. The whole 0.33 point difference lives in the denominator: € 300,000 against € 329,740. Anyone reading those two percentages as two different returns is looking at one return on two bases.
Sensitivity. If market value rises to € 320,000 while rent stays put, the cap rate falls to 3.46%. That feels backwards, because you just got richer. It is nonetheless right: cap rate measures what a buyer pays today for this income stream, and that buyer is now paying more for the same. Your net initial yield does not move, because your purchase price does not move.
5. What counts as a good cap rate?
A cap rate only means something against comparable assets in the same market and segment. Indicative ranges, not a published standard:
| Market | Indicative range | What sits behind it |
|---|---|---|
| Prime residential, major European cities | 3% to 4.5% | Priced for growth and liquidity, not for income |
| Dutch open-market residential, 2026 | 4% to 5.5% | The band the worked example above sits under |
| US multifamily, secondary markets | 5% to 7% | Higher operating cost load and a vacancy allowance baked in |
| UK regional residential | 5% to 7% | Yield-led buyers, weaker capital growth assumption |
These are indications based on customary ranges in each market, not quoted transaction data. Cap rates move with interest rates: when financing gets more expensive, buyers demand a higher cap rate and, at unchanged rent, bid less. That mechanism runs both ways and explains how values fall while rents carry on.
6. Three mistakes that distort the number
Putting the purchase price in the denominator. That produces a net initial yield and calls it a cap rate. On this property the gap is 0.33 points; on a property you have owned for years it can exceed a full percentage point.
Putting gross rent in the numerator. That produces a gross yield and calls it a cap rate. On this property it gives 5.90% instead of 3.69%: close to a doubling, and useless for comparison.
Comparing without knowing which costs came off. A cap rate with no vacancy allowance and no maintenance reserve sits structurally above one that has both. Ask which items were deducted before you place two properties side by side.
7. Run your own numbers
Enter your own figures above and cap rate and net initial yield move together. For cash flow, DSCR, financing and an exit year, the BRIX Calc rental calculator models the whole project, including multi-year operation and rent indexation.
8. Frequently asked questions
What is the difference between cap rate and net initial yield?
Only the denominator. Both divide the same NOI, but cap rate divides by market value and net initial yield by your total investment including transfer tax and acquisition costs. Cap rate is therefore the asset's return, net initial yield your purchase's return. Buy exactly at market value with no acquisition costs and they coincide.
Which value belongs in the denominator: purchase price or market value?
Market value. That is what separates cap rate from every other initial yield: it exists to compare assets on what they are worth today, not on what the current owner once paid. BRIX Calc uses the post-renovation market value for it.
Can you value a property with a cap rate?
Yes, and that is its most common use in practice. Invert the formula: value = NOI ÷ cap rate. An NOI of € 11,074 at a market cap rate of 4.5% implies a little over € 246,000. Use a cap rate drawn from comparable transactions in the same market, and check that it rests on the same cost boundary as your NOI.
Does the mortgage belong in the cap rate?
No, in no form. Interest and principal both stay out, precisely so that two buyers with different financing get the same number for the same building. To see what financing does to your return, use cash-on-cash or return on equity.
Why does my cap rate fall when the property becomes more valuable?
Because value sits in the denominator and rent does not follow it. A higher market value at unchanged NOI means literally that a buyer pays more for the same income, and that is a lower cap rate. It is not a deterioration in your position but a change in the price the market puts on that income.
What is a cap rate in the Dutch market called?
There is no exact equivalent, which is why the confusion persists. The Dutch market quotes bruto aanvangsrendement (gross initial yield, on total investment) and netto aanvangsrendement (net initial yield, also on total investment). Neither uses market value as the denominator, so neither is a cap rate, and translating either as "cap rate" quietly changes the basis.