Get a rental property's capitalization rate — net operating income divided by price — the standard yardstick for comparing income properties.
Cap rate = net operating income ÷ price, and NOI excludes mortgage/financing costs by definition. Operating expenses should include taxes, insurance, management, maintenance, and vacancy. It ignores financing and appreciation. Not investment advice.
The capitalization rate is a property's unleveraged annual return: net operating income as a percentage of price. It strips out financing so you can compare properties on the income they produce alone. Higher cap rates usually mean more income relative to price — but often more risk or work; prime markets trade at lower caps.
Cap rate = (annual rent − operating expenses) ÷ price
The capitalization rate is the return a property would earn if you paid cash: net operating income ÷ price. Because there is no mortgage in the formula, it strips financing out of the comparison and lets you set a $350,000 fourplex beside a $1.2 million strip center on equal terms. That is exactly why brokers quote it and why appraisers use it to value income property.
Net operating income is annual rent (and any other income, such as laundry or parking) minus operating expenses: property tax, insurance, management, maintenance, a vacancy allowance, utilities you pay, and HOA. It excludes the mortgage, depreciation, and your income tax. Get NOI wrong and the cap rate is wrong by the same proportion, which is the most common way listings overstate it: the seller's “pro forma” NOI often omits vacancy, management, and a repair reserve.
Price $350,000, gross annual rent $36,000, operating expenses $12,000. NOI is $24,000, so the cap rate is $24,000 ÷ $350,000 = 6.9%, and the gross rent multiplier is 9.7. Now flip the formula, because this is the part investors use most: value = NOI ÷ cap rate. At a 6% market cap rate that same $24,000 of income supports a $400,000 price; at 8% it supports $300,000. One percentage point of cap rate moves this property's value by roughly $50,000, which is why small changes in NOI and in market cap rates matter so much more than they look.
There is no universal number, and anyone who gives you one without asking where the property is should be treated with caution. Cap rates trade like bond yields: lower for safer, more liquid assets, higher for risk. As a rough guide only, prime properties in major metros often trade at 4–5%, stable properties in secondary markets at 6–8%, and older or higher-vacancy assets higher still because buyers demand more return for the risk. The useful comparisons are two: against recent comparable sales in the same submarket, and against your mortgage rate. If the cap rate is below your interest rate, financing the property produces negative leverage: every borrowed dollar earns less than it costs, and your cash-on-cash return lands below the cap rate.
Cap rate ignores your loan; cash-on-cash includes it. With cheap financing, cash-on-cash rises above the cap rate (positive leverage); with expensive financing it falls below. In a 7% rate environment, a 6.9% cap-rate property financed at 80% will usually show cash-on-cash in the low single digits, which is why so many 2020-vintage deals that “made sense at 4%” do not pencil today. Run both numbers, then decide.
Cap rate is a snapshot of one year. It cannot show rent growth against expense growth, a planned rent increase after renovation, or the exit cap rate you will sell into, and the exit cap is where most five-year projections quietly fail. When you are past screening and into underwriting, a deal analyzer with a multi-year pro-forma and a sensitivity grid on rent and price is the tool for that job.
It depends on the market — often 4%–6% in prime metros, 7%–10%+ in secondary markets or higher-risk assets. Compare within a market, not across very different ones.
Cap rate measures the property, not your financing. Two buyers with different loans see the same cap rate — use cash-on-cash return to factor in leverage.
Related: cash-on-cash return calculator · rental yield calculator · real estate ROI calculator · all free calculators.
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