What a 4% Cap Rate Means for a Rental Property

A 4% cap rate means the property's net operating income is 4% of its price each year, before any mortgage. A 4% 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% cap rate on a $300,000 property

To trade at a 4% cap rate, a $300,000 rental needs $12,000 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 $1,830 a month (0.61% of price, a gross rent multiplier of 13.7)
Gross scheduled income of $21,960, $20,862 after vacancy
Operating expenses of $8,855 (42% of collected income)
Net operating income of $12,007, or $1,001 a month

At a 4% cap rate, every $1,000 of annual NOI is worth $25,000 of value. Each $100 a month of rent, after vacancy and percentage expenses, adds about $23,370 to what the property is worth. Each $1,000 a year of expense removes $25,000.

Rent needed for a 4% 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%	Rent needed	Rent / price
$100k	$4,000	$610	0.61%
$150k	$6,000	$915	0.61%
$200k	$8,000	$1,220	0.61%
$250k	$10,000	$1,525	0.61%
$300k	$12,000	$1,830	0.61%
$350k	$14,000	$2,135	0.61%
$400k	$16,000	$2,440	0.61%
$500k	$20,000	$3,050	0.61%
$600k	$24,000	$3,660	0.61%
$750k	$30,000	$4,575	0.61%
$1m	$40,000	$6,100	0.61%

What NOI is worth at 4% versus nearby cap rates

The same income, valued at 3%, 4%, 4.5%. This is the spread a buyer and seller argue over.

Annual NOI	Value at 3%	Value at 4%	Value at 4.5%
$10,000	$333,333	$250,000	$222,222
$15,000	$500,000	$375,000	$333,333
$20,000	$666,667	$500,000	$444,444
$25,000	$833,333	$625,000	$555,556
$30,000	$1,000,000	$750,000	$666,667
$40,000	$1,333,333	$1,000,000	$888,889
$50,000	$1,666,667	$1,250,000	$1,111,111

Check your own property against 4%

The calculator is loaded with the example above and a 4% target. Replace the numbers with yours to see the value your NOI supports at 4%.

Cap rate

4.00%

Moderate

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

$12,007 NOI / $300,000 price

Net operating income

Gross scheduled income: $21,960
Vacancy: -$1,098
Effective gross income: $20,862
Taxes and insurance: -$5,100
Maintenance, reserves, management: -$3,755
Net operating income: $12,007
Monthly NOI: $1,001
Expense ratiooperating expenses / collected income: 42%

At a 4.00% cap rate

Value of this NOI: $300,171
Priced below that by: $171
NOI needed at this price: $12,000
Rent needed at this pricevs $1,830 now: $1,829

Other screens

Gross rent multiplierprice / annual gross rent: 13.7
Rent to pricemonthly rent / price. The 1% rule.: 0.61%
Each $100/mo of rent is worthof value at the target cap rate: $23,370
Each $1,000/yr of expense costsof value at the target cap rate: $25,000

4% cap rate questions

Is a 4% cap rate good?

It is normal for a large metro and low for a cash-flow market. A 4% 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% cap rate on a $300,000 property?

About $1,830 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 $12,000 of NOI, which is 4% of $300,000.

What is a property with $20,000 of NOI worth at a 4% cap rate?

$500,000. Divide NOI by the cap rate as a decimal: $20,000 / 0.04 = $500,000. At a 4% cap rate, each $1,000 of annual NOI is worth $25,000.