Cap rate is one of the first numbers experienced investors look at when comparing income properties. It strips out financing and gives you a clean measure of what the property itself earns relative to what you pay.
By Jessica Martinez · Real Estate Finance Editor · Updated June 2026Enter your numbers to see cap rate next to cash-on-cash return and total ROI side by side.
Cap rate (capitalization rate) equals Net Operating Income (NOI) divided by the property's current market value (or purchase price). A $300,000 property producing $21,000 in NOI has a 7% cap rate. The higher the cap rate, the more income you receive per dollar of purchase price, though higher cap rates often reflect higher risk or lower-quality markets.
Cap Rate = Net Operating Income / Purchase Price (or Current Market Value)
NOI is gross rental income minus vacancy allowance minus operating expenses (taxes, insurance, maintenance, property management). It does NOT include mortgage principal or interest, depreciation, or income taxes. NOI is the property's pre-financing earning power.
A single-family rental lists for $280,000. Monthly rent is $2,000 ($24,000/year). Estimated vacancy is 5% (-$1,200). Operating expenses (taxes, insurance, maintenance, management) total $7,200/year. NOI = $24,000 - $1,200 - $7,200 = $15,600. Cap rate = $15,600 / $280,000 = 5.6%.
A "good" cap rate depends on location and property type. In expensive urban markets, 4-5% is typical for stabilized assets. In secondary or tertiary markets, 7-10% is common. Higher cap rates generally mean more cash flow per dollar invested but also more risk -- often because the market is weaker, the property is older, or the tenant base is less stable. A cap rate that is unusually high deserves scrutiny, not celebration.
Cap rate ignores financing. Cash-on-cash return measures the return on your actual cash invested (down payment, closing costs), accounting for your mortgage payment. A leveraged deal can have a much higher cash-on-cash return than cap rate -- or a lower one, if interest costs exceed the cap rate benefit. See cash-on-cash return explained for the full comparison.
Enter the purchase price, monthly rent, vacancy rate, and annual operating expenses in the Rental Property Calculator and it will compute the cap rate alongside cash flow, cash-on-cash return, and ROI automatically.
It depends on the market. In high-cost coastal cities, 4-5% is typical for stabilized income properties. In smaller or secondary markets, 7-10% is common. There is no universal 'good' number -- compare cap rates for similar properties in the same market to judge whether a deal is priced fairly.
A higher cap rate means more income relative to the price you pay, which sounds better. But higher cap rates often reflect higher risk -- a weaker rental market, older property, or less stable tenants. The best deals balance an attractive cap rate with manageable risk, not just the highest number you can find.
Multiply monthly rent by 12 for annual gross income, then subtract a vacancy allowance (commonly 5-10%) and annual operating expenses to get NOI. Divide NOI by the purchase price. Example: $2,000/month rent x 12 = $24,000 gross, minus $3,000 expenses = $21,000 NOI, divided by $300,000 purchase price = 7% cap rate.
Cap rate measures the property's income yield independent of financing. ROI (return on investment) typically accounts for all returns -- cash flow, equity paydown, appreciation -- relative to total cash invested. They answer different questions. Cap rate compares properties; ROI measures your actual investment performance over time.