What a 6.5% Cap Rate Means for a Rental Property

A 6.5% cap rate means the property's net operating income is 6.5% of its price each year, before any mortgage. A 6.5% cap rate is solid. It is the range where a rental can carry a conventional loan with 20 to 25% down and still produce cash flow, which is why mid-priced and secondary markets cluster here.

A 6.5% cap rate on a $500,000 property

To trade at a 6.5% cap rate, a $500,000 rental needs $32,500 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 $4,385 a month (0.88% of price, a gross rent multiplier of 9.5)
Gross scheduled income of $52,620, $49,989 after vacancy
Operating expenses of $17,498 (35% of collected income)
Net operating income of $32,491, or $2,708 a month

At a 6.5% cap rate, every $1,000 of annual NOI is worth $15,385 of value. Each $100 a month of rent, after vacancy and percentage expenses, adds about $14,382 to what the property is worth. Each $1,000 a year of expense removes $15,385.

Rent needed for a 6.5% 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 6.5%	Rent needed	Rent / price
$100k	$6,500	$875	0.88%
$150k	$9,750	$1,315	0.88%
$200k	$13,000	$1,755	0.88%
$250k	$16,250	$2,195	0.88%
$300k	$19,500	$2,630	0.88%
$350k	$22,750	$3,070	0.88%
$400k	$26,000	$3,510	0.88%
$500k	$32,500	$4,385	0.88%
$600k	$39,000	$5,265	0.88%
$750k	$48,750	$6,580	0.88%
$1m	$65,000	$8,770	0.88%

What NOI is worth at 6.5% versus nearby cap rates

The same income, valued at 6%, 6.5%, 7%. This is the spread a buyer and seller argue over.

Annual NOI	Value at 6%	Value at 6.5%	Value at 7%
$10,000	$166,667	$153,846	$142,857
$15,000	$250,000	$230,769	$214,286
$20,000	$333,333	$307,692	$285,714
$25,000	$416,667	$384,615	$357,143
$30,000	$500,000	$461,538	$428,571
$40,000	$666,667	$615,385	$571,429
$50,000	$833,333	$769,231	$714,286

Check your own property against 6.5%

The calculator is loaded with the example above and a 6.5% target. Replace the numbers with yours to see the value your NOI supports at 6.5%.

Build the NOI from rent, vacancy and expenses

Cap rate

6.50%

Solid

Solid. Mid-priced and secondary markets. Enough yield to cash flow with a normal loan.

$32,491 NOI / $500,000 price

Net operating income

Gross scheduled income: $52,620
Vacancy: -$2,631
Effective gross income: $49,989
Taxes and insurance: -$8,500
Maintenance, reserves, management: -$8,998
Net operating income: $32,491
Monthly NOI: $2,708
Expense ratiooperating expenses / collected income: 35%

At a 6.50% cap rate

Value of this NOI: $499,861
Priced above that by: $139
NOI needed at this price: $32,500
Rent needed at this pricevs $4,385 now: $4,386

Other screens

Gross rent multiplierprice / annual gross rent: 9.5
Rent to pricemonthly rent / price. The 1% rule.: 0.88%
Each $100/mo of rent is worthof value at the target cap rate: $14,382
Each $1,000/yr of expense costsof value at the target cap rate: $15,385

6.5% cap rate questions

Is a 6.5% cap rate good?

In most markets, yes. A 6.5% cap rate is above the 4 to 6% typical of major metros and produces enough income to carry a loan with a normal down payment. Compare it to recent sales in the same submarket; a 6.5% cap rate in a 5% market is a bargain, while in a 9% market it is expensive.

What rent do I need for a 6.5% cap rate on a $500,000 property?

About $4,385 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 $32,500 of NOI, which is 6.5% of $500,000.

What is a property with $20,000 of NOI worth at a 6.5% cap rate?

$307,692. Divide NOI by the cap rate as a decimal: $20,000 / 0.065 = $307,692. At a 6.5% cap rate, each $1,000 of annual NOI is worth $15,385.