Capitalization rate is annual net operating income (NOI) divided by the property's purchase price or current value, expressed as a percentage. It answers a simple question: if you paid all cash, what unlevered yield would this property produce in its first year? Cap rate ignores financing entirely, which makes it useful for comparing assets on an apples-to-apples basis.

How do you calculate cap rate step by step?

Step 1: add up gross annual rent. Step 2: subtract a realistic vacancy allowance (typically 4 to 6 percent) to get effective gross income. Step 3: add any other annual income like parking, pet rent, or laundry. Step 4: subtract every operating expense including property taxes, insurance, management fees, maintenance, HOA dues, utilities you pay, and reserves. That number is net operating income. Step 5: divide NOI by the purchase price or current value and multiply by 100. That result is your cap rate, expressed as a percentage.

What is the cap rate formula?

Cap rate equals net operating income divided by property value, multiplied by 100 to express it as a percentage. For example, a home worth $300,000 that generates $18,000 in annual NOI has a cap rate of 6.0 percent ($18,000 / $300,000 = 0.06). The formula ignores financing entirely, so it works whether you paid all cash or used a mortgage.

What is a good cap rate for a rental property?

There is no universal answer, and the ranges are market-dependent. In premium coastal markets (San Francisco, Los Angeles, Seattle), stabilized single-family rentals often trade at 3 to 5 percent because buyers pay for appreciation. In most Sun Belt secondary markets (Austin, Charlotte, Greenville, Nashville), 5 to 7 percent is healthy. In Midwest and legacy markets (Kansas City, Cincinnati, Memphis, St. Louis), 7 to 10 percent is common and reflects less appreciation upside. Anything above 10 percent usually reflects higher risk, an older asset, or a value-add opportunity that needs careful underwriting.

How is cap rate different from cash-on-cash return?

Cap rate ignores financing. Cash-on-cash divides annual pre-tax cash flow by the actual cash you put in (down payment, closing, capex). Cap rate compares assets. Cash-on-cash compares deals the way you'll actually fund them. Both matter. Neither replaces a full pro forma.

What operating expenses should I include in NOI?

Property taxes, insurance, property management fees, ongoing maintenance and repairs, HOA dues, utilities you pay, landscaping, pest control, and a realistic capex reserve. Do not include mortgage principal and interest, depreciation, or income taxes. NOI is an operating number, not a financing or tax number.

Why does vacancy belong in the cap rate calculation?

A property that runs 100 percent occupied every month exists only on a spreadsheet. Realistic underwriting assumes 4 to 6 percent vacancy across a full cycle. Leaving vacancy out inflates every downstream number and usually turns a fine deal into a great-looking one that disappoints in year one.

Is a higher cap rate always better?

No. A higher cap rate reflects higher yield, but it usually also reflects higher risk: smaller market, older housing stock, more concentrated tenant pool, or slower appreciation. A 10 percent cap in a small tertiary market can produce the same total return as a 5 percent cap in a market that appreciates 4 percent a year, but with more volatility. Match the cap rate to your risk tolerance and hold period, not just to a target number.

Cap rate calculator

Cap rate calculator for rental properties

Enter your purchase price, rent, and operating expenses. We'll calculate net operating income and cap rate in real time, then tell you how the number reads against a normal stabilized rental.

Property and income

Property value or purchase price

Monthly rent

Vacancy rate

Other annual income (parking, laundry, pet)

Annual operating expenses

Exclude mortgage principal and interest. NOI is an operating number, not a financing number.

Property taxes

Insurance

Property management fee

% of EGI

Maintenance and repairs

HOA dues

Utilities you pay

Other operating expenses

Cap rate vs. cash-on-cash vs. ROI

Cap rate ignores financing. Best for comparing assets.
Cash-on-cash divides annual cash flow by the cash you put in. Best for comparing deals as you'll actually fund them. Use our ROI calculator.
Total ROI / IRR rolls in appreciation, principal paydown, and eventual sale. Best when a full hold period is on the table. Model it with our rent vs sell calculator.

Your cap rate

Cap rate

0.00%

NOI $0 / value $0

Gross annual rent: $0
Effective gross income: $0
Total operating expenses: $0
Net operating income: $0
Monthly NOI: $0

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Enter a property value, monthly rent, and your operating expenses to see NOI and cap rate.

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What cap rate actually tells you

Capitalization rate is a first-look tool. It answers one question: if you paid all cash for this property, what unlevered yield would you earn in year one? Because it ignores financing, cap rate is the cleanest way to compare two assets side by side. Two rentals with wildly different mortgages produce different cash flow, but their cap rates reflect the underlying operating performance.

Cap rate has limits. It says nothing about appreciation, principal paydown, tax treatment, or how a specific loan structure changes the deal. It also assumes stabilized operations. A property in the middle of a value-add renovation will produce a misleading cap rate until the work is done and the rents are marked to market. Use cap rate to filter and compare. Use cash-on-cash and IRR to underwrite the deal you'll actually sign.

The most common mistake investors make is underloading expenses. Numbers that skip management, maintenance reserves, and realistic vacancy inflate NOI by 15 to 25 percent and hide the difference between a good deal and a marginal one. Load the expense side honestly. If the cap rate still clears your threshold, the deal will hold up in operation.

How to calculate cap rate: worked example

Scenario: a $300,000 single-family rental leased at $2,200/month.

Gross annual rent: $2,200 × 12 = $26,400.
Less 5% vacancy: $26,400 − $1,320 = $25,080 effective gross income.
Operating expenses: property taxes $3,600 + insurance $1,400 + management 8% ($2,006) + maintenance $1,800 + reserves $600 = $9,406.
Net operating income: $25,080 − $9,406 = $15,674.
Cap rate: $15,674 ÷ $300,000 = 5.22%.

That 5.22% would read as healthy in a Sun Belt metro like Charlotte or Austin, tight in coastal California, and light in a Midwest cash-flow market like Kansas City or Memphis.

What is a good cap rate by market?

Market type	Typical cap rate	What it reflects
Coastal California, NYC, Boston	3 to 5%	Premium markets. Buyers pay for appreciation and stability.
Sun Belt metros (Austin, Charlotte, Nashville, Greenville)	5 to 7%	Steady growth. Cap rate has compressed with population inflows.
Sun Belt secondary (San Antonio, Sacramento, Columbia SC)	6 to 8%	More yield, still meaningful appreciation runway.
Midwest and legacy metros (Kansas City, Cincinnati, Louisville, Memphis)	7 to 10%	Higher current yield, less appreciation. Cash flow is the play.
Tertiary and smaller markets	10%+	High yield reflects real risk: thinner tenant pool, older stock, less liquidity on exit.

Ranges are indicative for stabilized single-family and small multifamily rentals. Value-add, short-term rental, and specialty assets carry different benchmarks.