What is a good cap rate for a rental property?

A suitable cap rate depends on the property's condition, location, tenant quality, operating risks, financing plan, and your return target. Higher cap rates can reflect higher income but can also reflect greater vacancy, maintenance, or resale risk. Compare the property with recent sales and income data for similar properties in the same submarket, then test whether the expected income supports your own target return.

How do I calculate net operating income for cap rate?

Net operating income (NOI) is gross rental income minus operating expenses, before debt service. Expenses can include property tax, insurance, maintenance, repairs, management fees, landlord-paid utilities, and an allowance for vacancy. Do not include mortgage payments, capital improvements, or income tax in NOI. For example, if gross rent is $36,000 per year and expenses are $12,000 per year, NOI is $24,000. The OnSumo rental yield calculator can help you estimate NOI for properties you are evaluating.

Why do cap rates differ between property types and markets?

Cap rates reflect the income and risks investors associate with a property. Differences in location, tenant stability, lease terms, operating costs, expected rent growth, property condition, liquidity, and financing conditions can all affect the yield a buyer requires. Compare like with like: use recent transactions and income details for similar properties in the same local market.

How does cap rate relate to property value?

Property value equals NOI divided by cap rate. For example, if NOI is $50,000 and you apply a hypothetical 6% cap rate, the estimated property value is $833,333 ($50,000 / 0.06). If the cap rate compresses to 5%, the same property would be valued at $1,000,000 ($50,000 / 0.05). This is why investors care about cap rate trends: falling cap rates increase property values even if income stays flat, while rising cap rates reduce values. You can use this relationship to estimate value for properties that have not sold recently.

Should I buy a property with a higher cap rate or lower cap rate?

Neither is automatically better. A higher cap rate may provide more current income but may also reflect more vacancy, maintenance, tenant, or resale risk. A lower cap rate may reflect a property with different income or risk characteristics. Assess cap rate alongside cash-on-cash return, debt service coverage, property condition, lease details, and your financing and holding assumptions. The OnSumo cash-on-cash return calculator can help compare leveraged returns.

What is cap rate compression and why does it matter?

Cap rate compression occurs when property values rise faster than NOI, reducing cap rates. For example, if NOI stays at $50,000 but values rise from $833,333 (hypothetical 6% cap) to $1,000,000 (hypothetical 5% cap), the cap rate compressed by 100 basis points. Compression signals strong investor demand and optimism about future rent growth or appreciation, but it also means you are paying more for the same income. Buying at compressed cap rates increases your risk if the market turns and cap rates expand back to historical norms.

How do I use cap rate to compare properties in different cities?

Cap rate supports comparison independent of price or location. For example, a hypothetical $200,000 property with $12,000 NOI and a hypothetical $800,000 property with $48,000 NOI both have a 6% cap rate, so they offer the same unleveraged yield. Do not treat matching cap rates as matching investments: compare property condition, local demand, tenant profile, expenses, lease terms, and resale assumptions before deciding.

Does cap rate include mortgage payments?

No, cap rate measures unleveraged return and excludes debt service. It assumes you paid cash for the property. This makes cap rate useful for comparing properties independent of how you finance them. If you want to see your actual return with a mortgage, use cash-on-cash return, which divides annual cash flow (after debt service) by your down payment. The OnSumo cash-on-cash return calculator can help you model leveraged returns.

What is a terminal cap rate and when do I use it?

A terminal cap rate is the cap rate assumed when selling a property at the end of a holding period. It is used in a discounted cash flow model to estimate a future sale price. For example, if projected NOI is $60,000 and you assume a hypothetical 6% terminal cap rate, the estimated sale price is $1,000,000 ($60,000 / 0.06). Choose the assumption carefully because a small change in the terminal cap rate can materially change the estimated sale price.

Can I use cap rate for single-family rentals?

Yes. Cap rate can help compare the income performance of single-family rentals, but it should not be the only measure. A single-family home's value can be affected by owner-occupant demand as well as rental income. Consider cash flow, financing, maintenance, local sales comparisons, vacancy, and resale assumptions alongside cap rate. The OnSumo rental ROI calculator can help evaluate a single-family rental.

Cap Rate Calculator

The Cap Rate Calculator determines the capitalization rate for any investment property by dividing net operating income by purchase price. This calculator answers the investor's most critical question: what annual yield does this property generate before financing costs? Cap rate is the standard metric for comparing rental properties across markets, price points, and property types because it isolates the property's income-generating performance from how you choose to finance it. Enter gross rent, operating expenses, and property value to see the cap rate and assess the property's income performance relative to your target yield.

100% client-side. Inputs stay in your browser (ons-cap-rate-inputs).

Toggle between quoting a cap from value and backing into the price that clears your yield hurdle on the same NOI.

Annual gross rentVacancy rate (0–50%)Typical residential: 5–10%Annual operating expenses (excludes mortgage)Current property value or purchase price

Cap rate

6.72%

6–8%, solid; value-add or secondary markets

NOI

$16,800

Effective gross income

$22,800

Vacancy loss

−$1,200

NOI waterfall

Gross rent$24,000

Vacancy loss−$1,200

Effective gross income$22,800

Operating expenses−$6,000

NOI$16,800

Cap rate spectrum (0–30% scale)

You6.72%

<4% low yield
4–6% moderate
6–8% solid
8%+ high yield

How does the Cap Rate Calculator work step by step?

This calculator computes the capitalization rate (cap rate) for an investment property by dividing annual net operating income (NOI) by the purchase price or current market value. NOI is gross rental income minus operating expenses (property tax, insurance, maintenance, management), but before debt service. Cap rate is expressed as a percentage and represents the unleveraged yield you would earn if you bought the property in cash. It is a key metric for comparing investment properties on an apples-to-apples basis, independent of financing. For calculation purposes: a hypothetical 7% cap rate means the property generates $7 of NOI per year for every $100 of value. The calculator also runs in reverse: enter a target cap rate and NOI to find the maximum price you should pay to achieve that yield.

When should you use the Cap Rate Calculator?

Use this calculator when evaluating a rental property purchase to determine whether the asking price is justified by the income it produces. Cap rate helps you compare properties across markets, asset classes, and price points. It is especially valuable when deciding between multiple properties or when assessing whether a property is priced in line with your target yield. The tool is also useful for estimating property value when you know the NOI and your target cap rate: divide NOI by the cap rate to get value. As a calculation example: if a property generates $50,000 NOI and you require a hypothetical 6% cap rate, the implied value is $833,333. Real estate investors use cap rate to screen deals, negotiate purchase price, and decide whether a property fits their target return profile. Lenders and appraisers also reference cap rate when underwriting loans and determining property value for properties that generate rental income.

How do you read the Cap Rate Calculator results?

Higher cap rates indicate higher yield but often come with higher risk, lower-quality properties, or slower-growth markets. As a comparative example: a hypothetical property showing a 10% cap rate in a declining neighborhood may be riskier than a hypothetical 4% cap rate property in a gentrifying urban core. Lower cap rates indicate lower current yield but often come with stronger appreciation potential, better tenants, and lower vacancy risk. Compare the property's cap rate to recent sales of comparable properties in the same submarket to gauge relative value. Cap rate alone does not tell you whether to buy. A cap rate above the local comparable-sales average may signal undervalued opportunity or hidden risk the seller is not disclosing. A cap rate below the local comparable-sales average may indicate a premium asset with superior location, tenant mix, or condition that commands a lower yield.

What does a typical Cap Rate Calculator result look like?

Hypothetical calculation: Purchase price: $400,000. Gross rental income: $36,000/year. Operating expenses: $12,000/year (property tax, insurance, maintenance, management). Net operating income: $24,000. Cap rate: $24,000 / $400,000 = 6%. This calculation shows the property would generate a 6% unleveraged return. If you finance with 75% LTV at 6% interest, your cash-on-cash return will differ from the cap rate because debt amplifies or dampens returns depending on the loan rate versus cap rate. The OnSumo cash-on-cash return calculator can help you model leveraged returns. In reverse mode, if you set a target of 7% cap rate on a property generating $24,000 NOI, the calculator shows you should pay no more than $342,857 to hit that target yield.

What does cap rate tell you about a property?

Cap rate isolates the property's income performance from your financing choices, your tax situation, and your down payment. This makes it a fair comparison tool when evaluating properties of different prices and markets. For example: a hypothetical $200,000 property with $12,000 NOI has the same 6% cap rate as a hypothetical $800,000 property with $48,000 NOI. Both would generate the same unleveraged yield. The property with the lower cap rate is not worse; it may simply be in a better location where investors accept lower current income in exchange for appreciation. The property with the higher cap rate is not necessarily better; it may carry higher tenant turnover, deferred maintenance, or vacancy risk that justifies the higher yield. Cap rate is the starting point, not the final decision. After cap rate screening, you should also analyze cash-on-cash return, debt service coverage ratio, and total return including appreciation before making an offer.

How does cap rate compare to other real estate metrics?

Cap rate measures unleveraged return. Cash-on-cash return measures leveraged return (your actual equity yield after debt service). Internal rate of return (IRR) measures total return including appreciation and cash flow over the full hold period. Gross rent multiplier (GRM) measures price relative to gross rent without accounting for expenses. Each metric answers a different question. Cap rate answers: what yield does the property generate before financing? Cash-on-cash answers: what yield do I earn on my down payment? IRR answers: what is my annualized total return if I hold for X years and sell at Y price? GRM answers: how many years of gross rent does this property cost? Use cap rate to screen and compare properties on income performance alone. Use the other metrics to model your specific financing, hold period, and exit assumptions.

Frequently asked questions

What is a good cap rate for a rental property?
A suitable cap rate depends on the property's condition, location, tenant quality, operating risks, financing plan, and your return target. Higher cap rates can reflect higher income but can also reflect greater vacancy, maintenance, or resale risk. Compare the property with recent sales and income data for similar properties in the same submarket, then test whether the expected income supports your own target return.
How do I calculate net operating income for cap rate?
Net operating income (NOI) is gross rental income minus operating expenses, before debt service. Expenses can include property tax, insurance, maintenance, repairs, management fees, landlord-paid utilities, and an allowance for vacancy. Do not include mortgage payments, capital improvements, or income tax in NOI. For example, if gross rent is $36,000 per year and expenses are $12,000 per year, NOI is $24,000. The OnSumo rental yield calculator can help you estimate NOI for properties you are evaluating.
Why do cap rates differ between property types and markets?
Cap rates reflect the income and risks investors associate with a property. Differences in location, tenant stability, lease terms, operating costs, expected rent growth, property condition, liquidity, and financing conditions can all affect the yield a buyer requires. Compare like with like: use recent transactions and income details for similar properties in the same local market.
How does cap rate relate to property value?
Property value equals NOI divided by cap rate. For example, if NOI is $50,000 and you apply a hypothetical 6% cap rate, the estimated property value is $833,333 ($50,000 / 0.06). If the cap rate compresses to 5%, the same property would be valued at $1,000,000 ($50,000 / 0.05). This is why investors care about cap rate trends: falling cap rates increase property values even if income stays flat, while rising cap rates reduce values. You can use this relationship to estimate value for properties that have not sold recently.
Should I buy a property with a higher cap rate or lower cap rate?
Neither is automatically better. A higher cap rate may provide more current income but may also reflect more vacancy, maintenance, tenant, or resale risk. A lower cap rate may reflect a property with different income or risk characteristics. Assess cap rate alongside cash-on-cash return, debt service coverage, property condition, lease details, and your financing and holding assumptions. The OnSumo cash-on-cash return calculator can help compare leveraged returns.
What is cap rate compression and why does it matter?
Cap rate compression occurs when property values rise faster than NOI, reducing cap rates. For example, if NOI stays at $50,000 but values rise from $833,333 (hypothetical 6% cap) to $1,000,000 (hypothetical 5% cap), the cap rate compressed by 100 basis points. Compression signals strong investor demand and optimism about future rent growth or appreciation, but it also means you are paying more for the same income. Buying at compressed cap rates increases your risk if the market turns and cap rates expand back to historical norms.
How do I use cap rate to compare properties in different cities?
Cap rate supports comparison independent of price or location. For example, a hypothetical $200,000 property with $12,000 NOI and a hypothetical $800,000 property with $48,000 NOI both have a 6% cap rate, so they offer the same unleveraged yield. Do not treat matching cap rates as matching investments: compare property condition, local demand, tenant profile, expenses, lease terms, and resale assumptions before deciding.
Does cap rate include mortgage payments?
No, cap rate measures unleveraged return and excludes debt service. It assumes you paid cash for the property. This makes cap rate useful for comparing properties independent of how you finance them. If you want to see your actual return with a mortgage, use cash-on-cash return, which divides annual cash flow (after debt service) by your down payment. The OnSumo cash-on-cash return calculator can help you model leveraged returns.
What is a terminal cap rate and when do I use it?
A terminal cap rate is the cap rate assumed when selling a property at the end of a holding period. It is used in a discounted cash flow model to estimate a future sale price. For example, if projected NOI is $60,000 and you assume a hypothetical 6% terminal cap rate, the estimated sale price is $1,000,000 ($60,000 / 0.06). Choose the assumption carefully because a small change in the terminal cap rate can materially change the estimated sale price.
Can I use cap rate for single-family rentals?
Yes. Cap rate can help compare the income performance of single-family rentals, but it should not be the only measure. A single-family home's value can be affected by owner-occupant demand as well as rental income. Consider cash flow, financing, maintenance, local sales comparisons, vacancy, and resale assumptions alongside cap rate. The OnSumo rental ROI calculator can help evaluate a single-family rental.