Key takeaways
- Cap rate = net operating income (NOI) ÷ purchase price, as a percent.
- It measures the unleveraged return, so it compares deals regardless of financing.
- Most U.S. rentals trade in a 4%–10% cap-rate range — lower in expensive metros, higher in cash-flow markets.
- It excludes the mortgage; for the leveraged return, use cash-on-cash.
What is a cap rate?
A capitalization rate (cap rate) is a property's annual net operating income divided by its price, expressed as a percent. It tells you the return you'd earn buying the property in cash — which is why investors use it to compare deals side by side without financing clouding the picture.
Worked example
Take the calculator's default deal: a $350,000 property renting for $2,600/month, with a 5% vacancy allowance and $8,400 in annual operating expenses.
- Gross annual rent: $2,600 × 12 = $31,200
- Effective gross income (after 5% vacancy): $31,200 × 0.95 = $29,640
- Net operating income: $29,640 − $8,400 = $21,240
- Cap rate: $21,240 ÷ $350,000 = 6.07%
That 6.07% is the unleveraged yield. Buy the same property with a mortgage and your cash-on-cash return could be higher or lower, depending on the loan.
What counts as an operating expense?
- Property taxes and insurance
- Repairs, maintenance, and capital reserves
- Property management fees
- HOA dues, utilities you cover, landscaping
Mortgage principal and interest are not operating expenses — they're financing, and cap rate deliberately leaves them out.
What is a good cap rate?
There's no universal "good" number — it's a trade-off between risk and return. As a benchmark, here's how cap rates typically vary by property and market type:
| Property / market type | Typical cap rate |
|---|---|
| Class A multifamily, major metro | 4% – 5.5% |
| Class B/C apartments, secondary market | 5.5% – 7.5% |
| Single-family rental, cash-flow market | 6% – 9% |
| Higher-risk / tertiary market | 8% – 12% |
Ranges are illustrative and move with interest rates and local demand. For current national benchmarks, see the CBRE U.S. Cap Rate Survey or a local appraiser. A lower cap rate signals a pricier, lower-risk asset; a higher one signals more risk or more cash flow.
Frequently asked questions
What is a good cap rate?
Most investors target 5%–10%. Lower (4–5%) is typical in expensive, low-risk metros; higher (8–12%) shows up in higher-risk or higher-cash-flow markets. "Good" is relative to your market and risk tolerance.
Is a 6% cap rate good?
A 6% cap rate is middle-of-the-road — reasonable for a solid rental in a stable market. It's attractive in a low-rate, high-demand metro and unremarkable in a higher-yield cash-flow market.
Does cap rate include the mortgage?
No. Cap rate uses NOI, which excludes financing, so you can compare properties regardless of how each is funded.
Cap rate vs. cash-on-cash return?
Cap rate is the unleveraged return (no loan). Cash-on-cash return measures the return on the actual cash you invest after financing — usually the more relevant number when you use a mortgage.
How do interest rates affect cap rates?
They tend to move together: when borrowing costs rise, buyers pay less for the same income, which pushes cap rates up (and prices down). Falling rates compress cap rates.
Cap rate vs. ROI — what's the difference?
Cap rate is a property-level yield (NOI ÷ price). Total ROI also folds in loan paydown, appreciation, and tax benefits — see the rental property ROI calculator.