What is cap rate in real estate?

Cap rate (capitalization rate) is the ratio of a property's net operating income to its current market value. It is expressed as a percentage and used to estimate the potential return on a real estate investment. Formula: Cap Rate = Net Operating Income / Property Value.

What is a good cap rate for rental property?

A good cap rate depends on the market and asset class. In high-cost urban markets, 3-5% is typical. In smaller or secondary markets, 6-10% is common. Higher cap rates indicate higher potential returns but often reflect higher risk or slower appreciation markets.

How do I calculate net operating income for cap rate?

Net operating income (NOI) equals total rental income minus all operating expenses, excluding mortgage payments. Operating expenses include property taxes, insurance, maintenance, property management fees, utilities, and vacancy allowance. Do not subtract mortgage interest or depreciation from NOI.

How do you calculate cap rate?

Cap rate = net operating income divided by property value. Add up annual income, subtract operating expenses (taxes, insurance, repairs, management, vacancy) to get NOI, then divide NOI by the purchase price or current value. A $300,000 property with $18,000 NOI has a 6% cap rate.

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

Cap rate ignores financing and measures how the property performs (NOI divided by value). Cash-on-cash return divides annual pre-tax cash flow by the cash you actually invested, so it reflects your mortgage and measures how your investment performs.

Free Cap Rate Calculator for Rentals

Property Details

Property Purchase Price

$

Down Payment

$

Used for cash-on-cash return calculation

Rental Income

Gross Annual Rent

$

Vacancy Rate (%)

%

Typical: 5% for stable markets, 8-10% for higher turnover

Annual Operating Expenses

Do NOT include mortgage payments, NOI is calculated before debt service

Property Taxes

$

Insurance

$

Repairs & Maintenance

$

Management Fees

$

Other Expenses

$

Annual Mortgage Payment (for CoC)

$

Used only for cash-on-cash return (not NOI/cap rate)

Results

Net Operating Income (NOI)

$0

Effective Gross Income minus operating expenses

Capitalization Rate

0.00%

NOI / Property Value

Cash-on-Cash Return

0.00%

Annual cash flow / Cash invested (down payment)

Effective Gross Income $0

Total Operating Expenses $0

Annual Cash Flow (after debt) $0

What is a good cap rate?

Below 4%

Low yield, common in hot urban markets (NYC, SF). High appreciation potential but low income.

4% to 6%

Moderate, typical for suburban and secondary markets. Balanced risk/return.

6% to 10%

Good yield, Midwest and Southeast markets. Higher income, lower appreciation.

Above 10%

High yield, often signals higher risk, lower quality area, or distressed asset.

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How to calculate cap rate

The cap rate formula is simple: Cap Rate = Net Operating Income / Property Value, expressed as a percentage. Work it in three steps:

Find gross annual income. Add up all the rent and other income the property collects in a year.
Subtract operating expenses to get NOI. Take out property taxes, insurance, repairs and maintenance, property management, utilities you pay, and a vacancy allowance. Do not subtract mortgage payments or depreciation.
Divide NOI by the property value. A $300,000 property with $18,000 of NOI has a 6.0% cap rate. The calculator above does this instantly and also shows your cash-on-cash return.

What is NOI (net operating income)?

NOI is the income a property produces after operating expenses but before financing and taxes. It is the numerator in the cap rate formula and the cleanest way to compare two properties, because it strips out how each one is financed. Mortgage principal and interest, depreciation, and capital improvements are all excluded from NOI.

What is a good cap rate?

There is no single good number, because cap rate prices risk. A lower cap rate usually means a safer, more expensive market; a higher cap rate usually means more risk or slower appreciation. As a rough guide:

3% to 5%: high-cost, high-demand urban markets where prices are bid up.
6% to 8%: many stable suburban and secondary markets, a common buy-and-hold target.
9% and up: higher-yield or higher-risk markets, older properties, or weaker rent growth.

Compare a property's cap rate to other recent sales in the same market and asset class, not to a universal benchmark. For the full deal picture, pair it with the rental ROI and cash flow calculators.

Cap rate vs cash-on-cash return

Cap rate ignores financing; cash-on-cash return is the annual pre-tax cash flow divided by the cash you actually put in, so it does reflect your mortgage. Cap rate tells you how the asset performs; cash-on-cash tells you how your investment performs. This calculator shows both. Once you own the property, SealedFolio tracks all of it automatically, with no cloud and no account. See how it works.

This calculator runs entirely in your browser. Nothing you enter is saved or transmitted.

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