What the cap rate tells you — and what it leaves out
The capitalization rate — cap rate for short — answers a simple question: if you bought this property outright, with no loan at all, what annual return would its operating income represent against the price? It is calculated as the property's net operating income for a year divided by the purchase price, expressed as a percentage. In this calculator, net operating income means the rent you collect after realistic leaks: a vacancy allowance, maintenance, property management, property taxes, insurance and HOA dues. It deliberately excludes the mortgage payment, because the cap rate is meant to describe the property itself, not how you chose to finance it.
That financing-blindness is exactly what makes the cap rate useful. Two properties with different prices, rents and expense loads can be compared on one equal footing, and the same property can be compared against its own asking price: pay more for the same income stream and the cap rate falls. It is also why the cap rate cannot be the whole decision. It says nothing about your loan terms, the cash you actually have at risk, repairs that arrive in lumps rather than smooth percentages, or whether the local market is appreciating or stalling.
That is why this tool shows the cap rate alongside the figures financing changes: monthly and annual cash flow after the mortgage payment, and the cash-on-cash return on the cash you actually invested (down payment plus closing and rehab costs). Read together, they separate "is this a good property?" from "is this a good deal for my money?" — and those are two different questions with frequently different answers.