What Is Cap Rate?

The capitalization rate (cap rate) is the most widely used quick-comparison metric in real estate investing. It expresses a property's net operating income as a percentage of its price — letting you compare a $200,000 duplex against a $2 million apartment building on equal footing, regardless of how either is financed.

The Formula

Operating expenses include property tax, insurance, maintenance, property management, and HOA fees — but deliberately exclude mortgage principal and interest, since cap rate is meant to measure the property itself, not your specific financing.

How to Use This Calculator

Enter the purchase price and gross annual rent. Add a realistic vacancy rate (5% is a common baseline; adjust for your market). Then fill in operating expenses — property tax and insurance are usually known figures, while maintenance and management are commonly estimated as a percentage of rent if you don't have exact numbers yet.

What Counts as a Good Cap Rate

• Under 4%: typical of premium, low-risk markets (major coastal cities) — investors accept lower yield for stability and appreciation potential
• 4–6%: a common range for stable, moderate-growth markets
• 6–8%: often considered a solid cash-flow range in many secondary markets
• 8%+: typically signals higher cash flow but often comes with higher risk, weaker appreciation, or a less desirable location

There's no universal "good" cap rate — it depends entirely on the market, property type, and your investment goals. Comparing similar properties in the same area is far more useful than comparing against a generic national number.

Cap Rate's Big Limitation

Because cap rate ignores financing entirely, it doesn't tell you what actually lands in your pocket if you took out a mortgage. Two identical properties with the same cap rate can have wildly different cash-on-cash returns depending on the loan terms — which is exactly the gap our cash flow calculator fills.

Why Vacancy Rate Matters More Than People Think

A property that looks attractive at 100% occupancy can look mediocre once a realistic vacancy assumption is applied. Always use a vacancy rate based on the local market's actual rental data, not an optimistic guess — a property manager or local listing data can give you a realistic number for your specific area.

Worked Example

A $350,000 duplex renting for $3,000/month ($36,000/year), with 5% vacancy, $4,200 property tax, $1,500 insurance, 5% maintenance, and 8% management: effective gross income is $34,200, total operating expenses run about $10,440, leaving a NOI of roughly $23,760 — a cap rate of 6.8%.

Where This Fits Your Bigger Picture

Once a property clears your cap rate screen, model the actual mortgage-adjusted numbers with our rental property cash flow calculator. If you're comparing keeping versus selling an existing rental, see our sell vs. keep calculator.

Frequently Asked Questions