Summary
Cap rate = Net Operating Income / Property Price. It tells you the unlevered return on a rental property — the yield you'd earn paying all cash. A 7% cap rate means $7,000 annual NOI on a $100,000 property. This guide covers the formula, step-by-step calculation, what's “good” by market, and mistakes that skew your numbers.
Cap Rate Calculator: How to Calculate and Use Cap Rates
Reading time: 12-15 min
Published: March 6, 2026
Cap rate is the single most quoted metric in real estate investing — and the most misunderstood. Investors throw cap rate numbers around in conversation, but few can explain exactly what goes into the calculation or why a 6% cap rate means totally different things in Indianapolis versus San Francisco.
This guide breaks down cap rate from first principles. By the end, you'll know how to calculate it correctly, what constitutes a “good” cap rate, and when cap rate alone isn't enough to make a decision.
What You'll Learn
What Is Cap Rate?
Capitalization rate (cap rate) measures a property's income yield relative to its price. Think of it as the “interest rate” the property pays you — how much income you earn per dollar invested, assuming no mortgage.
A 7% cap rate means the property generates 7 cents of net operating income for every dollar of purchase price annually. On a $200,000 property, that's $14,000/year in NOI.
Why Cap Rate Matters:
- Standardizes comparison across different price points
- Removes financing from the equation (apples-to-apples)
- Reveals market-level risk and return expectations
- Quick way to screen deals before deep analysis
The Cap Rate Formula
Cap Rate Formula:
Cap Rate = NOI / Property Price × 100
NOI (Net Operating Income) = Gross Rental Income - Operating Expenses
Property Price = Purchase price or current market value
What Goes Into NOI?
Income (add these up):
- Monthly rent × 12
- Other income (laundry, parking, pet fees, storage)
Expenses (subtract these):
- Property taxes
- Insurance
- Maintenance and repairs
- Vacancy allowance
- Property management fees
- HOA dues
- Utilities paid by owner
- Capital expenditure reserves
Critical: What NOI Does NOT Include
- Mortgage payments (principal or interest)
- Income taxes
- Depreciation
- One-time capital improvements
These are excluded because they vary by investor, not by property. Cap rate is a property-level metric.
Step-by-Step Cap Rate Calculation
Let's calculate the cap rate for a rental property listed in Charlotte, NC.
Property Details:
- Purchase price: $240,000
- Monthly rent: $1,750
- Property tax: $2,160/year
- Insurance: $1,320/year
- No HOA
Step 1: Calculate Gross Income
$1,750/month × 12 = $21,000 gross annual income
Step 2: Estimate and Subtract Expenses
- Vacancy (7%): $21,000 × 0.07 = $1,470
- Property taxes: $2,160
- Insurance: $1,320
- Maintenance (1.5% of value): $3,600
- Property management (8%): $1,680
- CapEx reserves: $1,200
Total expenses: $11,430
Step 3: Calculate NOI
NOI = $21,000 - $11,430 = $9,570
Step 4: Divide by Price
Cap Rate = $9,570 / $240,000 × 100 = 3.99%
Just under 4%. This is typical for a growing market like Charlotte where investors pay a premium for appreciation potential.
What Is a Good Cap Rate?
There's no universal “good” cap rate. What's good depends on the market, property class, and your investment strategy. Here's a general framework:
3-5% Cap Rate
Expensive markets (coastal cities, top-tier metros). Lower risk, strong appreciation potential, minimal cashflow. Investors here bet on value growth.
6-8% Cap Rate
Sweet spot for many investors. Balance of income and growth. Markets like Raleigh, Jacksonville, and Atlanta frequently fall in this range.
8-10% Cap Rate
Strong cashflow markets. Typically lower appreciation. Cities like Indianapolis and Wichita. Great for income-focused investors.
10%+ Cap Rate
Proceed with caution. High cap rates often mean higher risk — rougher areas, deferred maintenance, tenant quality concerns. Requires experienced management.
The Cap Rate / Risk Relationship:
Cap rate is essentially a risk-adjusted return metric. Lower cap rates = lower perceived risk (investors willing to pay more per dollar of income). Higher cap rates = higher perceived risk (investors demand more income per dollar invested). A 4% cap rate in Phoenix isn't “worse” than an 8% cap rate in a declining Rust Belt city — it reflects different risk profiles.
Cap Rates by Market
Cap rates vary dramatically across markets. Understanding typical ranges helps you quickly assess whether a deal is above or below market for a given city.
Where to Find Market Cap Rates:
REI Lense tracks median cap rates across dozens of US markets based on real property analyses. You can explore live data on our markets page — each city shows median cap rate, cashflow, and cash-on-cash return for both long-term and short-term rental strategies.
Some popular markets to compare:
- Phoenix, AZ — appreciation-focused, lower cap rates
- Charlotte, NC — balanced growth and income
- Huntsville, AL — strong cashflow, growing market
- Las Vegas, NV — no state income tax, diverse economy
- Omaha, NE — stable economy, strong rent-to-price ratios
Remember: market-level cap rates are averages. Individual properties can be significantly higher or lower depending on condition, location within the city, and specific financials.
Cap Rate vs Other Investment Metrics
Cap Rate vs Cash-on-Cash Return
- Cap rate ignores financing — measures the property's unlevered yield.
- Cash-on-cash includes financing — measures return on your actual cash invested.
- Use cap rate to compare properties. Use cash-on-cash to evaluate your specific deal with your financing terms.
Learn more in our rental property analysis guide.
Cap Rate vs GRM (Gross Rent Multiplier)
- GRM = Purchase Price / Annual Gross Rent. Simpler but less accurate — ignores expenses entirely.
- Cap rate accounts for operating expenses through NOI. More reliable for comparing deals.
- GRM is useful for quick screening; cap rate for actual analysis.
Cap Rate vs Total ROI
- Cap rate only measures current income yield. It's a snapshot.
- Total ROI includes appreciation, principal paydown, tax benefits, and income over time.
- A low cap rate property can have excellent total ROI if it appreciates significantly.
Common Cap Rate Mistakes
Mistake #1: Using Gross Income Instead of NOI
The most common error. Dividing gross rent by price gives you gross yield, not cap rate. Without subtracting expenses, you'll overestimate returns by 40-50%.
Wrong: $21,000 rent / $240,000 = 8.75% (gross yield, NOT cap rate)
Right: $9,570 NOI / $240,000 = 3.99% (actual cap rate)
Mistake #2: Including Mortgage in NOI
NOI is a pre-financing metric. Including mortgage payments defeats the purpose of cap rate as a standardized comparison tool. Use cash-on-cash return for post-financing analysis.
Mistake #3: Forgetting Vacancy
Calculating NOI assuming 100% occupancy is unrealistic. Even in hot markets, budget 5-8% for vacancy and turnover costs.
Mistake #4: Using Seller's Pro Forma Numbers
Sellers and listing agents present best-case projections with inflated rents and understated expenses. Always calculate NOI yourself with conservative assumptions.
Mistake #5: Comparing Cap Rates Across Property Types
A 6% cap rate on a single-family home is very different from 6% on a 50-unit apartment complex. Compare like with like — same property type, same market class.
When Cap Rate Isn't Enough
Cap rate is powerful but limited. There are situations where it doesn't tell the full story:
Value-Add Properties
If you plan to renovate and raise rents, the current cap rate underestimates the deal. Calculate both the going-in cap rate (current) and the stabilized cap rate (after improvements).
High-Appreciation Markets
A 3.5% cap rate in Phoenix might generate better total returns than an 8% cap rate in a stagnant market once you factor in 5-7% annual appreciation.
Short-Term Rentals
STR income varies dramatically by season. A cap rate based on annualized income might not reflect the reality of 3-month peak seasons. Look at STR-specific market data for better insights.
Your Specific Financing
Cap rate doesn't account for leverage. A property with a 5% cap rate financed with a 7% interest rate will have negative leverage — your mortgage costs more than the property earns. Always calculate cash-on-cash return alongside cap rate.
Frequently Asked Questions
What is a cap rate in real estate?
Cap rate (capitalization rate) is the ratio of a property's Net Operating Income (NOI) to its purchase price or market value. It represents the expected return on an investment property if purchased with all cash, expressed as a percentage.
How do you calculate cap rate?
Cap Rate = Net Operating Income (NOI) / Property Price × 100. First calculate NOI by subtracting all operating expenses (taxes, insurance, maintenance, vacancy, management) from gross rental income. Then divide by the purchase price.
What is a good cap rate for a rental property?
A “good” cap rate depends on the market and property type. Generally: 4-5% in expensive coastal markets, 6-8% in mid-tier growth markets, and 8-12% in higher-yield markets. Most investors target 6% or higher for long-term rentals.
Does cap rate include mortgage payments?
No. Cap rate does NOT include mortgage payments. It uses Net Operating Income (NOI), which excludes financing costs. This makes cap rate useful for comparing properties regardless of how they're financed. Use cash-on-cash return to factor in mortgage costs.
Is a higher cap rate always better?
Not always. Higher cap rates mean higher income relative to price, but they often signal higher risk — rougher neighborhoods, older properties, or weaker tenant pools. Very high cap rates (12%+) warrant extra due diligence. The best investments balance reasonable cap rates with growth potential.
What is the difference between cap rate and ROI?
Cap rate measures the property's income yield without financing. ROI (return on investment) accounts for all returns including appreciation, principal paydown, and tax benefits relative to total investment. Cap rate is a snapshot; ROI is the full picture over time.
Calculate Cap Rates Instantly
Stop calculating cap rates manually for every property. REI Lense automatically calculates cap rate, cashflow, and cash-on-cash return for any property listed on Zillow, Redfin, or Realtor.com.
See Cap Rates Across Markets
Compare median cap rates across dozens of US cities. Find the markets that match your return targets.