A capitalization rate (cap rate) is the ratio of a property's net operating income (NOI) to its market value or purchase price, expressed as a percentage. It measures a property's potential return independent of financing. A $300,000 property generating $18,000 NOI has a cap rate of 6%. Cap rates are the standard metric investors use to compare real estate across markets and property types.

What is a good cap rate for rental property?

A "good" cap rate depends on your market and risk tolerance. In high-demand urban markets like Manhattan or San Francisco, cap rates of 3–4% are common because prices are high relative to rents. In secondary markets, 6–8% is typical. In rural or high-risk areas, investors often seek 9–12%+. Higher cap rates mean higher returns but usually higher risk — the market prices risk into the number.

What is included in operating expenses for cap rate?

Operating expenses include property taxes, insurance, property management fees (typically 8–10% of rent), maintenance and repairs, utilities (if landlord-paid), vacancy allowance (5–10% of gross rent is standard), and HOA dues if applicable. Mortgage payments are NOT included — cap rate is a pre-financing metric so you can compare properties regardless of how they're financed.

How do I use cap rate to find the right purchase price?

Divide the property's NOI by your target cap rate to get the maximum price you should pay. If a property generates $18,000 NOI and you need a 7% return: $18,000 ÷ 0.07 = $257,143. This is the "implied value" shown in the calculator. If the asking price is above this number, the deal does not meet your return threshold unless you can increase rents or cut expenses.

What is the difference between cap rate and cash-on-cash return?

Cap rate ignores financing and uses NOI divided by property value — it is a property-level return metric. Cash-on-cash return accounts for your actual mortgage payments and measures the cash return on your actual cash invested (down payment + closing costs). A property might have a 6% cap rate but a 10% cash-on-cash return if you used leverage effectively. Use cap rate to screen properties; use cash-on-cash to evaluate your actual investment return.

Can cap rate be negative?

Yes — if operating expenses exceed gross rental income, NOI is negative and so is the cap rate. This can happen with high vacancy, expensive properties in low-rent markets, or properties needing significant deferred maintenance. A negative cap rate means the property loses money before debt service. This is a red flag unless you are buying for appreciation potential in a specific market.

How does cap rate relate to property value?

Cap rate and property value move inversely: when cap rates compress (fall), property values rise for the same NOI. When cap rates expand (rise), values fall. This is why rising interest rates tend to push cap rates higher and put downward pressure on real estate prices — investors demand higher returns as their cost of capital increases. A property earning $20,000 NOI is worth $333,333 at a 6% cap rate but only $250,000 at an 8% cap rate.

Cap Rate Calculator — NOI & Property Value

Calculates cap rate % and NOI for rental properties, plus implied property value for any target cap rate.

How to Use This Cap Rate Calculator

This cap rate calculator gives you an instant read on any rental property — enter your property’s gross annual rental income, annual operating expenses (excluding mortgage), and current property value or purchase price. The calculator instantly shows your cap rate percentage and net operating income (NOI). Use the “What should I pay?” section below to enter a target cap rate and get the implied maximum purchase price you should offer. Share the link to save your inputs or send them to a partner.

Cap rate is just one piece of the investment picture. If you’re evaluating a home purchase rather than a rental, the home sale calculator helps you estimate net proceeds and profit when you sell.

How Cap Rate Is Calculated

Cap rate uses two numbers: net operating income (NOI) and property value. The formula is:

NOI = Gross Annual Rental Income − Annual Operating Expenses
Cap Rate = (NOI ÷ Property Value) × 100
Implied Value = NOI ÷ (Target Cap Rate ÷ 100)

Example: a property with $36,000 gross rent, $12,000 in operating expenses, and a $300,000 purchase price. NOI = $24,000. Cap rate = ($24,000 / $300,000) × 100 = 8.00%. If your target cap rate is 6%, the implied value is $24,000 / 0.06 = $400,000.

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What Is a Good Cap Rate by Market Type?

Cap rate benchmarks vary significantly by geography and property type. Here are typical ranges as of 2026:

Top-tier urban markets (NYC, SF, LA): 3–5%
Major metros (Chicago, Seattle, Denver): 4–6%
Secondary cities (Nashville, Austin, Phoenix): 5–8%
Tertiary and rural markets: 7–12%
Multifamily (apartments): 4–7% nationally
Single-family rentals: 5–9%
Commercial retail/office: 5–9%

A high cap rate is not always better — it typically signals higher risk, lower appreciation potential, or a less desirable market. Many experienced investors accept 4–6% cap rates in strong markets because they expect rent growth and appreciation to drive total returns well above that figure.

What to Include in Operating Expenses

The accuracy of your cap rate depends entirely on using realistic operating expenses. Common items to include:

Property taxes — often 1–2% of assessed value annually
Insurance — landlord policy, typically $800–$2,000/year for SFR
Property management — 8–10% of gross rents if professionally managed
Maintenance and repairs — budget 1% of property value per year as a baseline
Vacancy allowance — 5–10% of gross rent (one month vacancy = ~8.3%)
Utilities — if landlord-paid (water, trash, common area)
Capital expenditures reserve — roof, HVAC, appliances replacement fund

Do NOT include mortgage principal or interest — cap rate is a pre-financing metric by design.

Cap Rate vs. Cash-on-Cash Return

Cap rate measures the property’s return as if you paid all cash. Cash-on-cash return measures your actual return on the cash you invested (down payment + closing costs) after debt service. These two metrics are complementary:

Use cap rate to screen and compare properties on a level playing field
Use cash-on-cash to evaluate your actual investment performance once you know your financing terms

When interest rates are low, leverage can boost cash-on-cash returns well above the cap rate. When rates are high (above the cap rate), leverage is “negative” and actually reduces your cash-on-cash return below cap rate. This is why rising rates put downward pressure on property values. For a full picture of your rental income potential, also use the prorated rent calculator when a tenant moves in mid-month.

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Using Cap Rate to Negotiate Purchase Price

The implied value feature in this calculator is a negotiation tool. Once you know your target cap rate — the minimum return you’ll accept — you can calculate the maximum price you should pay for any property with a known NOI. Present this to a seller with documentation of comparable cap rates in the area to justify your offer.

If a seller insists on a higher price, your counter is to either increase NOI (by raising rents or cutting expenses) or accept a lower cap rate. Many successful investors set a hard floor (e.g., “I never buy below a 6% cap rate in this market”) and walk away from deals that don’t meet it.

Limitations of Cap Rate

Cap rate is a snapshot metric — it does not account for appreciation, rent growth, loan amortization, or tax benefits (depreciation). Two identical cap rates can represent very different investment outcomes depending on the market, tenant quality, lease terms, and property condition. Always underwrite investments with multiple metrics: cap rate, cash-on-cash return, gross rent multiplier (GRM), and an IRR projection over your intended hold period.

Financial Disclaimer

This calculator is for informational purposes only. Results are estimates based on the inputs you provide and do not account for all costs, market conditions, or individual circumstances. Cap rate benchmarks described here reflect general market conditions as of 2026 and vary by location. Consult a licensed real estate professional or financial advisor before making investment decisions.

Cap Rate Calculator