What a 5% Cap Rate Means for a Rental Property

A 5% cap rate means the property's net operating income is 5% of its price each year, before any mortgage. A 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% cap rate on a $300,000 property

To trade at a 5% cap rate, a $300,000 rental needs $15,000 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 $2,150 a month (0.72% of price, a gross rent multiplier of 11.6)
Gross scheduled income of $25,800, $24,510 after vacancy
Operating expenses of $9,512 (39% of collected income)
Net operating income of $14,998, or $1,250 a month

At a 5% cap rate, every $1,000 of annual NOI is worth $20,000 of value. Each $100 a month of rent, after vacancy and percentage expenses, adds about $18,696 to what the property is worth. Each $1,000 a year of expense removes $20,000.

Rent needed for a 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%	Rent needed	Rent / price
$100k	$5,000	$715	0.71%
$150k	$7,500	$1,075	0.72%
$200k	$10,000	$1,435	0.72%
$250k	$12,500	$1,790	0.72%
$300k	$15,000	$2,150	0.72%
$350k	$17,500	$2,510	0.72%
$400k	$20,000	$2,865	0.72%
$500k	$25,000	$3,585	0.72%
$600k	$30,000	$4,300	0.72%
$750k	$37,500	$5,375	0.72%
$1m	$50,000	$7,165	0.72%

What NOI is worth at 5% versus nearby cap rates

The same income, valued at 4.5%, 5%, 5.5%. This is the spread a buyer and seller argue over.

Annual NOI	Value at 4.5%	Value at 5%	Value at 5.5%
$10,000	$222,222	$200,000	$181,818
$15,000	$333,333	$300,000	$272,727
$20,000	$444,444	$400,000	$363,636
$25,000	$555,556	$500,000	$454,545
$30,000	$666,667	$600,000	$545,455
$40,000	$888,889	$800,000	$727,273
$50,000	$1,111,111	$1,000,000	$909,091

Check your own property against 5%

The calculator is loaded with the example above and a 5% target. Replace the numbers with yours to see the value your NOI supports at 5%.

Cap rate

5.00%

Moderate

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

$14,998 NOI / $300,000 price

Net operating income

Gross scheduled income: $25,800
Vacancy: -$1,290
Effective gross income: $24,510
Taxes and insurance: -$5,100
Maintenance, reserves, management: -$4,412
Net operating income: $14,998
Monthly NOI: $1,250
Expense ratiooperating expenses / collected income: 39%

At a 5.00% cap rate

Value of this NOI: $299,964
Priced above that by: $36
NOI needed at this price: $15,000
Rent needed at this pricevs $2,150 now: $2,150

Other screens

Gross rent multiplierprice / annual gross rent: 11.6
Rent to pricemonthly rent / price. The 1% rule.: 0.72%
Each $100/mo of rent is worthof value at the target cap rate: $18,696
Each $1,000/yr of expense costsof value at the target cap rate: $20,000

5% cap rate questions

Is a 5% cap rate good?

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

About $2,150 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 $15,000 of NOI, which is 5% of $300,000.

What is a property with $20,000 of NOI worth at a 5% cap rate?

$400,000. Divide NOI by the cap rate as a decimal: $20,000 / 0.05 = $400,000. At a 5% cap rate, each $1,000 of annual NOI is worth $20,000.