Cap Rate Calculator

Capitalization rate (cap rate) is the most widely used metric for evaluating rental property investments. It measures a property’s annual income potential as a percentage of its purchase price, independent of how you finance the deal.

The formula is simple: Cap Rate = NOI ÷ Purchase Price. Net Operating Income (NOI) is your gross rental income minus vacancy losses and operating expenses (taxes, insurance, maintenance). Mortgage payments are intentionally excluded — cap rate measures the property’s performance, not your financing strategy.

This makes cap rate ideal for comparing properties apples-to-apples. Whether you’re paying cash or putting 20% down, the cap rate is the same. It tells you: “For every dollar of purchase price, how many cents does this property earn per year?”

There’s no universally “good” cap rate — it depends on the market, property type, and your investment goals. Here’s how to think about the number:

Below 4%: Common in premium urban markets (Manhattan, San Francisco, coastal LA). These properties trade on appreciation potential, not cash flow. Low cap rate doesn’t mean bad investment — it means the market is pricing in low risk and future value growth.

4–6%: Typical for stable suburban markets and Class A properties. Moderate cash flow with reliable tenants and lower turnover. Most institutional investors target this range.

6–10%: Common in secondary cities and Class B/C properties. Stronger cash flow, but may come with more management intensity, higher vacancy, or deferred maintenance. This is where most small landlords find the best balance of yield and effort.

Above 10%: High-yield territory. Often found in rural areas, distressed properties, or markets with declining population. The high cap rate compensates for higher risk — vacancy, tenant quality, or capital expenditure surprises.

Using seller’s “pro forma” numbers. Sellers often present cap rates based on projected rents, full occupancy, and understated expenses. Always calculate cap rate using actual rents, realistic vacancy, and your own expense estimates.

Forgetting expenses. New investors frequently omit maintenance reserves, property management, or capital expenditures from their NOI calculation. An incomplete expense list inflates your cap rate and makes bad deals look good.

Comparing across markets. A 5% cap rate in San Francisco and a 5% cap rate in Memphis represent very different risk profiles and appreciation potential. Only compare cap rates within the same market and property class.

Treating cap rate as the only metric. Cap rate ignores financing, appreciation, and tax benefits. A low-cap-rate property with 3% annual appreciation and favorable tax treatment can outperform a high-cap-rate property in a flat market. Use cap rate alongside cash-on-cash return and IRR for the complete picture. Our rental property calculator computes all three.

Use conservative numbers. Overestimate expenses and underestimate rent. If the cap rate still works with pessimistic assumptions, you have a margin of safety.

Compare to local alternatives. What cap rate could you get buying a different property in the same area? If the market average is 6% and your deal is 4%, you need a strong reason (appreciation, value-add potential) to justify the lower yield.

Don’t chase cap rate alone. A 12% cap rate in a declining market is not better than a 5% cap rate in a growing one. Cap rate is one input in your decision, not the whole answer.

Track your actual cap rate. After you buy, track real income and expenses to see how your actual cap rate compares to projections. Tools like Vantric help landlords track rent, expenses, and property performance in one place.