Find a rental property's capitalization rate from its purchase price, rental income, and operating expenses — and see the net operating income behind it.
The capitalization rate (cap rate) is the annual return a rental property would produce if you bought it in cash — before any mortgage. It lets investors compare very different properties on a single, financing-neutral number. A higher cap rate generally signals more income relative to price (and often more risk); a lower cap rate often reflects a premium or appreciation-focused market.
The cap rate formula is:
Cap Rate = Net Operating Income (NOI) ÷ Purchase Price
Net operating income is your effective gross rental income minus all operating expenses — property taxes, insurance, management, maintenance, HOA dues, and a realistic vacancy allowance. Crucially, NOI excludes mortgage payments, which is why cap rate measures the property itself rather than how you financed it.
Worked example:a $300,000 property rents for $36,000 a year. With a 5% vacancy allowance, effective gross income is $34,200. Subtract $12,000 of operating expenses and NOI is $22,200. Cap rate = $22,200 ÷ $300,000 = 7.4%. Plug your own numbers into the calculator above to see your result update instantly.
There is no universal “good” cap rate — it depends on the market, property class, and your risk tolerance. As a rule of thumb, many rental markets trade in roughly a 4%–10% range. Lower cap rates tend to appear in high-demand metros where investors accept less current income in exchange for appreciation and stability; higher cap rates often come with older properties, weaker markets, or more management intensity. Always compare a property’s cap rate to recent sales of similar properties in the same area, not to a national benchmark.
Cap rate is a screening tool, not a complete underwriting model. It ignores financing, appreciation, capital expenditures, and tax treatment, and it’s only as good as your income and expense estimates. Treat it as the first filter, then dig into financing and full cash flow before you commit. When you’re ready to compare financing, get matched with investor-friendly lenders or explore the DSCR Calculator and BRRRR Calculator.
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Get MatchedThe capitalization rate (cap rate) is the annual return a rental property would produce if bought in cash, before any mortgage. It equals net operating income divided by the purchase price, and lets investors compare properties on a financing-neutral basis.
Cap rate = net operating income (NOI) divided by purchase price, expressed as a percentage. NOI is your effective gross rental income minus operating expenses such as taxes, insurance, management, and maintenance — excluding mortgage payments.
It depends on the market and your risk tolerance. Many rental markets trade in roughly a 4% to 10% range. Lower cap rates are common in high-demand, appreciation-focused metros; higher cap rates often come with older properties, weaker markets, or more management. Always compare against similar local sales.
No. Cap rate is unleveraged — NOI excludes mortgage payments, so the figure reflects the property itself rather than how it was financed. That is what makes cap rate useful for comparing deals.
Cap rate ignores your loan and measures the property's unleveraged return. Cash-on-cash return measures the return on the actual cash you invested after financing, so it reflects your specific down payment and loan terms.
GRM uses gross rent and skips operating expenses, making it a faster but blunter screening tool. Cap rate accounts for operating costs through NOI, so it gives a more accurate picture of a property's income return.
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