What a 12% Cap Rate Means for a Rental Property

A 12% cap rate means the property's net operating income is 12% of its price each year, before any mortgage. A 12% 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 12% cap rate on a $500,000 property

To trade at a 12% cap rate, a $500,000 rental needs $60,000 of net operating income. With 5% vacancy, taxes of $6,000, insurance of $2,500 and 18% of collected rent for maintenance, reserves and management, that takes:

Rent of $7,330 a month (1.47% of price, a gross rent multiplier of 5.7)
Gross scheduled income of $87,960, $83,562 after vacancy
Operating expenses of $23,541 (28% of collected income)
Net operating income of $60,021, or $5,002 a month

At a 12% cap rate, every $1,000 of annual NOI is worth $8,333 of value. Each $100 a month of rent, after vacancy and percentage expenses, adds about $7,790 to what the property is worth. Each $1,000 a year of expense removes $8,333.

Rent needed for a 12% 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 12%	Rent needed	Rent / price
$100k	$12,000	$1,465	1.47%
$150k	$18,000	$2,200	1.47%
$200k	$24,000	$2,930	1.47%
$250k	$30,000	$3,665	1.47%
$300k	$36,000	$4,395	1.47%
$350k	$42,000	$5,130	1.47%
$400k	$48,000	$5,860	1.47%
$500k	$60,000	$7,330	1.47%
$600k	$72,000	$8,795	1.47%
$750k	$90,000	$10,990	1.47%
$1m	$120,000	$14,655	1.47%

What NOI is worth at 12% versus nearby cap rates

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

Annual NOI	Value at 10%	Value at 12%
$10,000	$100,000	$83,333
$15,000	$150,000	$125,000
$20,000	$200,000	$166,667
$25,000	$250,000	$208,333
$30,000	$300,000	$250,000
$40,000	$400,000	$333,333
$50,000	$500,000	$416,667

Check your own property against 12%

The calculator is loaded with the example above and a 12% target. Replace the numbers with yours to see the value your NOI supports at 12%.

Build the NOI from rent, vacancy and expenses

Cap rate

12.00%

Very high

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

$60,021 NOI / $500,000 price

Net operating income

Gross scheduled income: $87,960
Vacancy: -$4,398
Effective gross income: $83,562
Taxes and insurance: -$8,500
Maintenance, reserves, management: -$15,041
Net operating income: $60,021
Monthly NOI: $5,002
Expense ratiooperating expenses / collected income: 28%

At a 12.00% cap rate

Value of this NOI: $500,174
Priced below that by: $174
NOI needed at this price: $60,000
Rent needed at this pricevs $7,330 now: $7,328

Other screens

Gross rent multiplierprice / annual gross rent: 5.7
Rent to pricemonthly rent / price. The 1% rule.: 1.47%
Each $100/mo of rent is worthof value at the target cap rate: $7,790
Each $1,000/yr of expense costsof value at the target cap rate: $8,333

12% cap rate questions

Is a 12% 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 12% cap rate on a $500,000 property?

About $7,330 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 $60,000 of NOI, which is 12% of $500,000.

What is a property with $20,000 of NOI worth at a 12% cap rate?

$166,667. Divide NOI by the cap rate as a decimal: $20,000 / 0.12 = $166,667. At a 12% cap rate, each $1,000 of annual NOI is worth $8,333.