What a 2% Cap Rate Means for a Rental Property

A 2% cap rate means the property's net operating income is 2% of its price each year, before any mortgage. A 2% cap rate is low. Buyers accepting it are paying for location, tenant quality and expected appreciation rather than current income. At today's mortgage rates a property at this cap rate will not cover its own loan payment with a normal down payment.

A 2% cap rate on a $500,000 property

To trade at a 2% cap rate, a $500,000 rental needs $10,000 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 $1,980 a month (0.40% of price, a gross rent multiplier of 21.0)
Gross scheduled income of $23,760, $22,572 after vacancy
Operating expenses of $12,563 (56% of collected income)
Net operating income of $10,009, or $834 a month

At a 2% cap rate, every $1,000 of annual NOI is worth $50,000 of value. Each $100 a month of rent, after vacancy and percentage expenses, adds about $46,740 to what the property is worth. Each $1,000 a year of expense removes $50,000.

Rent needed for a 2% 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 2%	Rent needed	Rent / price
$100k	$2,000	$395	0.40%
$150k	$3,000	$595	0.40%
$200k	$4,000	$790	0.40%
$250k	$5,000	$990	0.40%
$300k	$6,000	$1,185	0.40%
$350k	$7,000	$1,385	0.40%
$400k	$8,000	$1,585	0.40%
$500k	$10,000	$1,980	0.40%
$600k	$12,000	$2,375	0.40%
$750k	$15,000	$2,970	0.40%
$1m	$20,000	$3,960	0.40%

What NOI is worth at 2% versus nearby cap rates

The same income, valued at 2%, 3%. This is the spread a buyer and seller argue over.

Annual NOI	Value at 2%	Value at 3%
$10,000	$500,000	$333,333
$15,000	$750,000	$500,000
$20,000	$1,000,000	$666,667
$25,000	$1,250,000	$833,333
$30,000	$1,500,000	$1,000,000
$40,000	$2,000,000	$1,333,333
$50,000	$2,500,000	$1,666,667

Check your own property against 2%

The calculator is loaded with the example above and a 2% target. Replace the numbers with yours to see the value your NOI supports at 2%.

Build the NOI from rent, vacancy and expenses

Cap rate

2.00%

Low

Low. Typical of expensive, high-demand markets where buyers are paying for appreciation, not income.

$10,009 NOI / $500,000 price

Net operating income

Gross scheduled income: $23,760
Vacancy: -$1,188
Effective gross income: $22,572
Taxes and insurance: -$8,500
Maintenance, reserves, management: -$4,063
Net operating income: $10,009
Monthly NOI: $834
Expense ratiooperating expenses / collected income: 56%

At a 2.00% cap rate

Value of this NOI: $500,452
Priced below that by: $452
NOI needed at this price: $10,000
Rent needed at this pricevs $1,980 now: $1,979

Other screens

Gross rent multiplierprice / annual gross rent: 21.0
Rent to pricemonthly rent / price. The 1% rule.: 0.40%
Each $100/mo of rent is worthof value at the target cap rate: $46,740
Each $1,000/yr of expense costsof value at the target cap rate: $50,000

2% cap rate questions

Is a 2% cap rate good?

Only if you are buying for appreciation. A 2% cap rate means the property yields less than most loans cost, so financed buyers lose money on cash flow. It is common in premium coastal markets and rare anywhere else.

What rent do I need for a 2% cap rate on a $500,000 property?

About $1,980 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 $10,000 of NOI, which is 2% of $500,000.

What is a property with $20,000 of NOI worth at a 2% cap rate?

$1,000,000. Divide NOI by the cap rate as a decimal: $20,000 / 0.02 = $1,000,000. At a 2% cap rate, each $1,000 of annual NOI is worth $50,000.