Cap rate calculator
What the property earns relative to its price, before financing.
Designed for residential rental properties — single-family homes, condos, and small multifamily.
Cap rate
0.00%
Net operating income
$0.00
Cap rate = Net operating income ÷ Purchase price
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Is this a good investment? →How it works
Cap rate tells you how much a property earns each year as a percentage of its price, as if you paid all cash. It strips out financing so you can compare properties fairly.
Net operating income (NOI) is rent after vacancy minus operating expenses — taxes, insurance, maintenance, management. It never includes the mortgage.
Worked example: a $250,000 single-family rental
- 1.Monthly rent$2,000
- 2.Gross annual rent ($2,000 × 12)$24,000
- 3.Minus 5% vacancy allowance− $1,200
- 4.Effective rental income$22,800
- 5.Minus operating expenses (taxes, insurance, maintenance, management)− $7,020
- 6.Net operating income (NOI)$15,780
- 7.Cap rate ($15,780 ÷ $250,000 × 100)6.31%
A 6.31% cap rate is solidly in the typical 5–8% range for residential rentals. Notice the mortgage never appeared — cap rate measures the property's earning power, not your loan. To see what you'd actually pocket, run the same deal through the cash-on-cash calculator.
How to calculate cap rate, step by step
Start with the gross annual rent — monthly rent times twelve. Subtract a vacancy allowance (5% is a sensible default; use 8–10% in softer markets) to get your effective rental income. Then subtract every operating expense: property taxes, insurance, maintenance, property management, HOA dues, and any utilities you pay as the owner. What remains is your net operating income.
Divide NOI by the purchase price and multiply by 100. A $250,000 property with $15,780 of NOI has a 6.31% cap rate. Notice what's missing: the mortgage. Cap rate deliberately ignores financing because it measures the property's earning power, not your loan structure.
What is a good cap rate for a rental property?
For single-family and small residential rentals, 5–8% is the typical range in most US markets. Below 4% usually means an expensive, appreciation-driven market where cash flow is thin. Above 8–10% often signals a weaker rental market, an older property with deferred maintenance, or a tenant base with more turnover risk.
The right target depends on your strategy. If you want stable, low-touch income in a growing metro, a 5–6% cap rate in a strong neighborhood can beat a 9% cap rate in a declining one. Cap rate is a comparison tool — use it to rank similar properties in the same market, not as an absolute pass/fail line.
Cap rate vs cash-on-cash return
These two numbers answer different questions. Cap rate asks: what does the property earn relative to its price? Cash-on-cash return asks: what does my actual invested cash earn after the mortgage? A 6% cap rate deal can produce a 2% or a 12% cash-on-cash return depending entirely on your loan terms.
Use cap rate first to screen and compare properties on equal footing. Then run cash-on-cash with your real down payment and interest rate to see the deal you'd actually own. Our full rental property analysis runs both, plus cash flow and DSCR, in one pass.
Common cap rate mistakes
The biggest mistake is using the seller's or agent's NOI without verifying it. Listings routinely omit vacancy, management, and maintenance to inflate the cap rate. Rebuild the expense list yourself: taxes from the county assessor, insurance from a real quote, and at least 5–8% of rent for maintenance.
The second mistake is comparing cap rates across different markets or property conditions. A 7% cap rate on a turnkey property in a growing suburb is a very different risk profile than 7% on a 1920s duplex in a shrinking town. Always pair the cap rate with a look at the neighborhood's rent trends and employment base.
Frequently asked questions
What is a good cap rate?
For residential rentals, 5–8% is typical. Higher cap rates usually mean higher risk or less desirable areas; lower cap rates are common in expensive, stable markets.
Does cap rate include the mortgage?
No. Cap rate ignores financing. Use cash-on-cash return to see what you earn on the cash you actually put in.
Is a higher cap rate always better?
Not always. A high cap rate can signal a property that needs work, a weak rental market, or unreliable tenants.
How do I estimate operating expenses for a cap rate?
Add property taxes (from the county assessor), an insurance quote, 5–8% of rent for maintenance, 8–10% for management if you'll hire it out, plus HOA and owner-paid utilities. A quick screen is 35–45% of gross rent.
What cap rate do I need to beat a stock index fund?
There's no fixed line, but many investors want a cap rate at least 2–3 points above their mortgage rate, or a clear path to 8%+ cash-on-cash, to justify the extra work and risk over passive investing.