Below 4%
Lower potential return, often found in expensive or lower-risk markets.
Cap Rate Calculator
Calculate a rental property's capitalization rate, net operating income, and operating expenses.
How to interpret your cap rate
4%–6%
Moderate cap rate.
6%–8%
Strong potential return with potentially higher risk.
Above 8%
High projected return, but requires careful risk assessment.
Cap rate ranges are general benchmarks, not universal investment ratings. A suitable cap rate depends on the market, property type, condition, location, and investment risk.
What is a cap rate?
Cap rate, short for capitalization rate, estimates a property's expected annual operating return using its net operating income (NOI) and value. Financing is not part of the calculation, so the metric can help compare properties without being affected by a down payment, loan rate, or loan term.
A cap rate is an estimate of operating performance, not a guarantee of a property's actual return. It is most useful alongside a careful review of the income, expenses, location, and risks behind the numbers.
How to calculate cap rate
Cap Rate = Net Operating Income ÷ Property Value × 100
Start with gross annual rental income: monthly rent multiplied by 12. Vacancy reduces that potential income, leaving effective rental income. Subtract recurring operating expenses from effective rental income to find NOI, then divide NOI by the property value.
For the calculator's default assumptions, the property value is $300,000 and NOI is $18,120. That produces a 6.04% cap rate:
- Property Value
- $300,000
- Net Operating Income
- $18,120
- Cap Rate
- 6.04%
$18,120 ÷ $300,000 × 100 = 6.04%
What is a good cap rate for a rental property?
There is no universal “good” cap rate. The ranges in the cap rate interpretation guide are general reference points: below 4% can indicate lower projected return in expensive or lower-risk markets; 4%–6% is often moderate; 6%–8% can indicate a stronger projected return with potentially higher risk; and above 8% warrants especially careful assessment.
Compare like-for-like properties within the same market. City and neighborhood, property type and condition, tenant demand, vacancy risk, expected maintenance, local taxes and insurance, potential appreciation, and overall investment risk can all affect what is acceptable. A higher cap rate is not automatically better if it reflects costs or risks you are not prepared to take on.
Cap rate vs. cash-on-cash return
Cap rate is based on NOI and property value. Because it excludes mortgage payments and does not change with the financing structure, it is useful for comparing the operating performance of properties.
Cash-on-cash return uses annual pre-tax cash flow and the cash actually invested. It includes mortgage payments and changes with the down payment and loan terms, making it useful for evaluating the return on your own invested capital. The Rental Property Calculator lets you review both measures together. Neither metric is always better; they answer different questions.
What expenses are included in cap rate?
This calculator's operating expenses include property tax, insurance, maintenance, property management, HOA fees, and other recurring operating expenses. Mortgage payments do not belong in NOI or cap rate because they are financing costs rather than operating costs.
The calculator does not automatically include mortgage principal and interest, income taxes, depreciation, capital expenditures, acquisition and closing costs, or one-time major renovations. Verify the actual expenses for the specific property and include additional recurring costs in Other Expenses when needed.