What a 5.5% Cap Rate Means for a Rental Property

A 5.5% cap rate means the property's net operating income is 5.5% of its price each year, before any mortgage. A 5.5% 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 5.5% cap rate on a $500,000 property

To trade at a 5.5% cap rate, a $500,000 rental needs $27,500 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 $3,850 a month (0.77% of price, a gross rent multiplier of 10.8)
Gross scheduled income of $46,200, $43,890 after vacancy
Operating expenses of $16,400 (37% of collected income)
Net operating income of $27,490, or $2,291 a month

At a 5.5% cap rate, every $1,000 of annual NOI is worth $18,182 of value. Each $100 a month of rent, after vacancy and percentage expenses, adds about $16,996 to what the property is worth. Each $1,000 a year of expense removes $18,182.

Rent needed for a 5.5% 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 5.5%	Rent needed	Rent / price
$100k	$5,500	$770	0.77%
$150k	$8,250	$1,155	0.77%
$200k	$11,000	$1,540	0.77%
$250k	$13,750	$1,925	0.77%
$300k	$16,500	$2,310	0.77%
$350k	$19,250	$2,695	0.77%
$400k	$22,000	$3,080	0.77%
$500k	$27,500	$3,850	0.77%
$600k	$33,000	$4,620	0.77%
$750k	$41,250	$5,775	0.77%
$1m	$55,000	$7,700	0.77%

What NOI is worth at 5.5% versus nearby cap rates

The same income, valued at 5%, 5.5%, 6%. This is the spread a buyer and seller argue over.

Annual NOI	Value at 5%	Value at 5.5%	Value at 6%
$10,000	$200,000	$181,818	$166,667
$15,000	$300,000	$272,727	$250,000
$20,000	$400,000	$363,636	$333,333
$25,000	$500,000	$454,545	$416,667
$30,000	$600,000	$545,455	$500,000
$40,000	$800,000	$727,273	$666,667
$50,000	$1,000,000	$909,091	$833,333

Check your own property against 5.5%

The calculator is loaded with the example above and a 5.5% target. Replace the numbers with yours to see the value your NOI supports at 5.5%.

Build the NOI from rent, vacancy and expenses

Cap rate

5.50%

Moderate

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

$27,490 NOI / $500,000 price

Net operating income

Gross scheduled income: $46,200
Vacancy: -$2,310
Effective gross income: $43,890
Taxes and insurance: -$8,500
Maintenance, reserves, management: -$7,900
Net operating income: $27,490
Monthly NOI: $2,291
Expense ratiooperating expenses / collected income: 37%

At a 5.50% cap rate

Value of this NOI: $499,815
Priced above that by: $185
NOI needed at this price: $27,500
Rent needed at this pricevs $3,850 now: $3,851

Other screens

Gross rent multiplierprice / annual gross rent: 10.8
Rent to pricemonthly rent / price. The 1% rule.: 0.77%
Each $100/mo of rent is worthof value at the target cap rate: $16,996
Each $1,000/yr of expense costsof value at the target cap rate: $18,182

5.5% cap rate questions

Is a 5.5% cap rate good?

It is normal for a large metro and low for a cash-flow market. A 5.5% 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 5.5% cap rate on a $500,000 property?

About $3,850 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 $27,500 of NOI, which is 5.5% of $500,000.

What is a property with $20,000 of NOI worth at a 5.5% cap rate?

$363,636. Divide NOI by the cap rate as a decimal: $20,000 / 0.055 = $363,636. At a 5.5% cap rate, each $1,000 of annual NOI is worth $18,182.