What a 4.5% Cap Rate Means for a Rental Property

A 4.5% cap rate means the property's net operating income is 4.5% of its price each year, before any mortgage. A 4.5% cap rate is moderate, and typical of most large metros. The income is real but leaves little margin after a mortgage. Investors buying here usually expect rent growth to do part of the work.

A 4.5% cap rate on a $300,000 property

To trade at a 4.5% cap rate, a $300,000 rental needs $13,500 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 $1,990 a month (0.66% of price, a gross rent multiplier of 12.6)
Gross scheduled income of $23,880, $22,686 after vacancy
Operating expenses of $9,183 (40% of collected income)
Net operating income of $13,503, or $1,125 a month

At a 4.5% cap rate, every $1,000 of annual NOI is worth $22,222 of value. Each $100 a month of rent, after vacancy and percentage expenses, adds about $20,773 to what the property is worth. Each $1,000 a year of expense removes $22,222.

Rent needed for a 4.5% 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 4.5%	Rent needed	Rent / price
$100k	$4,500	$665	0.66%
$150k	$6,750	$995	0.66%
$200k	$9,000	$1,325	0.66%
$250k	$11,250	$1,660	0.66%
$300k	$13,500	$1,990	0.66%
$350k	$15,750	$2,320	0.66%
$400k	$18,000	$2,655	0.66%
$500k	$22,500	$3,315	0.66%
$600k	$27,000	$3,980	0.66%
$750k	$33,750	$4,975	0.66%
$1m	$45,000	$6,630	0.66%

What NOI is worth at 4.5% versus nearby cap rates

The same income, valued at 4%, 4.5%, 5%. This is the spread a buyer and seller argue over.

Annual NOI	Value at 4%	Value at 4.5%	Value at 5%
$10,000	$250,000	$222,222	$200,000
$15,000	$375,000	$333,333	$300,000
$20,000	$500,000	$444,444	$400,000
$25,000	$625,000	$555,556	$500,000
$30,000	$750,000	$666,667	$600,000
$40,000	$1,000,000	$888,889	$800,000
$50,000	$1,250,000	$1,111,111	$1,000,000

Check your own property against 4.5%

The calculator is loaded with the example above and a 4.5% target. Replace the numbers with yours to see the value your NOI supports at 4.5%.

Cap rate

4.50%

Moderate

Moderate. Common in most major metros. Income is real but thin relative to price.

$13,503 NOI / $300,000 price

Net operating income

Gross scheduled income: $23,880
Vacancy: -$1,194
Effective gross income: $22,686
Taxes and insurance: -$5,100
Maintenance, reserves, management: -$4,083
Net operating income: $13,503
Monthly NOI: $1,125
Expense ratiooperating expenses / collected income: 40%

At a 4.50% cap rate

Value of this NOI: $300,056
Priced below that by: $56
NOI needed at this price: $13,500
Rent needed at this pricevs $1,990 now: $1,990

Other screens

Gross rent multiplierprice / annual gross rent: 12.6
Rent to pricemonthly rent / price. The 1% rule.: 0.66%
Each $100/mo of rent is worthof value at the target cap rate: $20,773
Each $1,000/yr of expense costsof value at the target cap rate: $22,222

4.5% cap rate questions

Is a 4.5% cap rate good?

It is normal for a large metro and low for a cash-flow market. A 4.5% cap rate covers expenses but leaves a thin margin after debt at current interest rates. Whether it is good depends on the market's rent growth and what comparable properties trade at.

What rent do I need for a 4.5% cap rate on a $300,000 property?

About $1,990 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 $13,500 of NOI, which is 4.5% of $300,000.

What is a property with $20,000 of NOI worth at a 4.5% cap rate?

$444,444. Divide NOI by the cap rate as a decimal: $20,000 / 0.045 = $444,444. At a 4.5% cap rate, each $1,000 of annual NOI is worth $22,222.