Cap Rate Guide: What It Is, How to Calculate It, and What Counts as Good
A practical guide to capitalization rates for rental property investors — building an honest NOI, reading the market, and the traps in seller math.
Read articleCap Rate Calculator
The investor's standard yardstick: what a property earns on its own, before any mortgage enters the picture.
$
Annual rental income minus operating expenses, before mortgage payments
$
Cap Rate
5.63%
Monthly NOI$1,500
Cap rate = NOI ÷ property value. It ignores financing, which makes it useful for comparing properties on equal footing.
Getting NOI right
Cap rate is only as good as the NOI behind it. Start with all rental income, subtract operating expenses — property taxes, insurance, maintenance, management fees, utilities you pay, and a realistic vacancy allowance — but not mortgage payments or depreciation. Sellers' marketing materials often quote NOI with optimistic vacancy and maintenance numbers; rebuild it yourself before trusting the advertised cap rate.
Reading the number
Most US residential investment property trades roughly between 4% and 10%. Lower cap rates cluster in expensive, stable markets where investors accept less income for less risk; higher cap rates pay more income but often come with more vacancy, maintenance, or market risk. Compare against recent sales in the same neighborhood, not a national average. For a quicker pre-screen before building a full NOI, start with the Rental Yield Calculator.
Frequently asked questions
What is NOI?
Net operating income: all rental income minus operating expenses (taxes, insurance, maintenance, management, vacancy), before mortgage payments. It measures the property’s own earning power.
What is a good cap rate?
Most investment properties trade between roughly 4% and 10%. Lower cap rates usually mean lower risk and stronger markets; higher cap rates mean more income relative to price, often with more risk.
How is cap rate different from cash-on-cash return?
Cap rate ignores financing, so it compares properties on equal footing. Cash-on-cash return measures the income relative to the actual cash you invested, including the effect of your mortgage.
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