What a 10% Cap Rate Means for a Rental Property

A 10% cap rate means the property's net operating income is 10% of its price each year, before any mortgage. A 10% cap rate is very high. Either the market is very cheap, the property is distressed or mispriced, or the expenses used to compute NOI are understated. Verify every line before trusting it.

A 10% cap rate on a $300,000 property

To trade at a 10% cap rate, a $300,000 rental needs $30,000 of net operating income. With 5% vacancy, taxes of $3,600, insurance of $1,500 and 18% of collected rent for maintenance, reserves and management, that takes:

Rent of $3,755 a month (1.25% of price, a gross rent multiplier of 6.7)
Gross scheduled income of $45,060, $42,807 after vacancy
Operating expenses of $12,805 (30% of collected income)
Net operating income of $30,002, or $2,500 a month

At a 10% cap rate, every $1,000 of annual NOI is worth $10,000 of value. Each $100 a month of rent, after vacancy and percentage expenses, adds about $9,348 to what the property is worth. Each $1,000 a year of expense removes $10,000.

Rent needed for a 10% cap rate at other prices

Same expense assumptions, different prices. The last column, rent as a percent of price, is the quick screen that tells you whether a market can produce this cap rate at all.

Price	NOI for 10%	Rent needed	Rent / price
$100k	$10,000	$1,250	1.25%
$150k	$15,000	$1,875	1.25%
$200k	$20,000	$2,505	1.25%
$250k	$25,000	$3,130	1.25%
$300k	$30,000	$3,755	1.25%
$350k	$35,000	$4,380	1.25%
$400k	$40,000	$5,005	1.25%
$500k	$50,000	$6,260	1.25%
$600k	$60,000	$7,510	1.25%
$750k	$75,000	$9,385	1.25%
$1m	$100,000	$12,515	1.25%

What NOI is worth at 10% versus nearby cap rates

The same income, valued at 9%, 10%, 12%. This is the spread a buyer and seller argue over.

Annual NOI	Value at 9%	Value at 10%	Value at 12%
$10,000	$111,111	$100,000	$83,333
$15,000	$166,667	$150,000	$125,000
$20,000	$222,222	$200,000	$166,667
$25,000	$277,778	$250,000	$208,333
$30,000	$333,333	$300,000	$250,000
$40,000	$444,444	$400,000	$333,333
$50,000	$555,556	$500,000	$416,667

Check your own property against 10%

The calculator is loaded with the example above and a 10% target. Replace the numbers with yours to see the value your NOI supports at 10%.

Cap rate

10.00%

Very high

Very high. Either a very cheap market, a mispriced deal, or expenses that are understated. Verify every line.

$30,002 NOI / $300,000 price

Net operating income

Gross scheduled income: $45,060
Vacancy: -$2,253
Effective gross income: $42,807
Taxes and insurance: -$5,100
Maintenance, reserves, management: -$7,705
Net operating income: $30,002
Monthly NOI: $2,500
Expense ratiooperating expenses / collected income: 30%

At a 10.00% cap rate

Value of this NOI: $300,017
Priced below that by: $17
NOI needed at this price: $30,000
Rent needed at this pricevs $3,755 now: $3,755

Other screens

Gross rent multiplierprice / annual gross rent: 6.7
Rent to pricemonthly rent / price. The 1% rule.: 1.25%
Each $100/mo of rent is worthof value at the target cap rate: $9,348
Each $1,000/yr of expense costsof value at the target cap rate: $10,000

10% cap rate questions

Is a 10% cap rate good?

It is suspiciously good. Cap rates above 10% usually mean a very cheap market, a distressed property, or an NOI computed without management, reserves or realistic vacancy. Recompute the expenses before relying on it.

What rent do I need for a 10% cap rate on a $300,000 property?

About $3,755 a month under standard expense assumptions (5% vacancy, taxes 1.2% and insurance 0.5% of price, 18% of collected rent for maintenance, reserves and management). That produces $30,000 of NOI, which is 10% of $300,000.

What is a property with $20,000 of NOI worth at a 10% cap rate?

$200,000. Divide NOI by the cap rate as a decimal: $20,000 / 0.1 = $200,000. At a 10% cap rate, each $1,000 of annual NOI is worth $10,000.