How to Calculate the Cap Rate on an Apartment Building
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To calculate the cap rate on an apartment building, divide one year of net operating income (NOI) by the purchase price: cap rate = NOI ÷ price. A building with $592,000 of NOI priced at $8,000,000 has a 7.40% cap rate. The formula takes ten seconds. The work is deciding which NOI to use, because the same building can show a cap rate anywhere from about 7.3% to 9.0% depending on whose numbers you start from.
This post is part of our guide to real estate syndication. It shows how to calculate a cap rate. To judge whether a cap rate is fair for the market, see what is a good cap rate. Rules and figures are as of November 2026.
What is the cap rate formula?
The capitalization rate is the yield a buyer would earn in one year if they paid all cash:
| You know | You want | Formula |
|---|---|---|
| NOI and price | Cap rate | NOI ÷ price |
| NOI and market cap rate | Price | NOI ÷ cap rate |
| Price and market cap rate | NOI the price implies | Price × cap rate |
NOI starts with the rent the building could collect if every unit were leased at its current rent (gross potential rent). Subtract vacancy, concessions and bad debt, add other income such as parking, laundry and utility reimbursements, then subtract operating expenses: property taxes, insurance, repairs, payroll, utilities, management and administration. Our net operating income guide lists what goes in each line.
Leave out the mortgage payment, depreciation, the owner's income tax and capital projects such as new roofs. Those are real costs, but they belong to the owner and the financing, not to the building's operations, so including them makes cap rates impossible to compare.
How do you calculate it, one line at a time?
Here is a 40-unit building offered at $8,000,000. The figures are an example, not a real property.
- Gross potential rent: $1,200,000 (40 units, average $2,500 a month).
- Vacancy, concessions and credit loss: minus $84,000 (7%).
- Other income: plus $60,000.
- Effective gross income: $1,176,000.
- Operating expenses (trailing 12 months): minus $540,000, including $96,000 of property taxes.
- NOI: $636,000.
- Cap rate: $636,000 ÷ $8,000,000 = 7.95%.
That is the trailing cap rate, built from the seller's trailing 12 month statement (the T12). Before you trust it, check the T12 against the rent roll and bank deposits; see reading a rent roll and T12.
Which cap rate is the right one?
The same building gives a different answer depending on which NOI you use. Here are the five versions you will meet:
| Version | What changes | NOI | Cap rate at $8,000,000 |
|---|---|---|---|
| Seller's pro forma | Market rents on every unit, lower expenses | $720,000 | 9.00% |
| Trailing 3 months, annualized | Recent rent increases counted for a full year | $660,000 | 8.25% |
| Trailing 12 months | What the building actually earned last year | $636,000 | 7.95% |
| Tax-adjusted trailing | Property taxes reset to the purchase price ($140,000 instead of $96,000) | $592,000 | 7.40% |
| Lender's underwritten | Tax-adjusted, plus $250 a unit of replacement reserves | $582,000 | 7.28% |
The gap between the top and bottom rows is 1.72 percentage points. On this building that is the difference between a price of $8,000,000 and one of about $6,467,000 at the same 9.00% cap rate.
Which to use: price a deal on the tax-adjusted trailing NOI, because it describes what the building will earn under your ownership on day one. Use the pro forma only to show the value you expect to add, and label it that way. Many states reassess property taxes when a building sells; see property tax reassessment in underwriting. Lenders usually underwrite their own NOI with reserves deducted, so expect their number to be the lowest.
How do you work backward from a market cap rate?
Brokers and appraisers often start from the market: "buildings like this trade at a 7% cap." To turn that into a price, divide NOI by the cap rate.
- At the tax-adjusted NOI of $592,000 and a 7.00% market cap rate, the building is worth about $8,457,000.
- At the same NOI and a 7.50% cap rate, it is worth about $7,893,000.
A half-point change in the cap rate moved the value by about $564,000, or 7%. That sensitivity is why the exit cap rate in a sale projection deserves as much scrutiny as the purchase price; see the exit cap rate assumption.
To find the NOI a price implies, multiply: $8,000,000 × 7.00% = $560,000. If the building earns less than that today, the price assumes growth you will have to create.
What mistakes make a cap rate misleading?
- Mixing NOI versions. Comparing your trailing cap rate with a seller's pro forma cap rate on a comparable sale is comparing two different things.
- Leaving out management. A self-managed seller may show no management fee. A buyer paying a manager must add one.
- Counting one-time income. Insurance proceeds, a large lease buyout or a back-rent catch-up inflate one year's NOI.
- Ignoring the tax reset. On a building bought well above its assessed value, this is often the largest single correction.
- Treating capital projects as expenses, or the reverse. A roof replacement is not an operating expense; a recurring repair is. See repairs vs capital improvements.
How does the cap rate fit with the rest of the underwriting?
The cap rate is a one-year, all-cash snapshot. It says nothing about the loan, growth, renovation or sale. To see how the debt changes the picture, compare the cap rate with the loan's interest cost; see positive and negative leverage. To see what a renovation adds, compare the cap rate with the yield on your total cost; see yield on cost vs cap rate. Our underwriting basics post connects all of them.
You can check any of the numbers above with our free cap rate and DSCR calculator.
How DoorRaise fits in
DoorRaise helps sponsors raise the equity for apartment buildings with 5 or more units from their friends and followers. A sponsor enters a few deal numbers and DoorRaise computes the rest of the deal page, forms the deal's LLC, prepares the offering documents, files Form D and verifies every investor's accreditation, in 506(b) and 506(c) deals. Investors fund by wire into escrow at Enterprise Bank & Trust. DoorRaise charges two flat fees: $1,500 to set up (non-refundable) and $5,000 a year for administration, the first year paid at closing from the money raised and only if the deal closes.
When your cap rate holds up on tax-adjusted trailing numbers, start your deal.
FAQ
What is the formula for cap rate?
Cap rate equals net operating income divided by the purchase price or value. For example, $592,000 of NOI on an $8,000,000 price is a 7.40% cap rate.
Do you include the mortgage payment when calculating cap rate?
No. NOI is calculated before debt service, so the cap rate is the same whether a buyer pays cash or borrows. The loan's effect shows up in cash-on-cash return and the debt service coverage ratio.
Should I use trailing or pro forma NOI?
Use trailing 12 month NOI with property taxes reset to your purchase price to set the price. Show pro forma NOI separately, as the value you expect to add, and label it as a projection.
Are replacement reserves included in NOI?
It depends on who is calculating. Many lenders deduct replacement reserves when they underwrite NOI, while brokers often quote NOI before reserves. Say which one you used.
How do I find a property's value from the cap rate?
Divide the NOI by the cap rate. A building with $592,000 of NOI at a 7.00% cap rate is worth about $8,457,000.
Sources
- Fannie Mae Multifamily Selling and Servicing Guide
- Freddie Mac Multifamily, Optigo Conventional Small term sheet
- IRS Publication 527, Residential Rental Property
This article is general information, not legal, tax or investment advice. The example building and its figures are illustrative. DoorRaise is not a lender, law firm, broker-dealer, investment adviser or funding portal.