What a 6% Cap Rate Means for a Rental Property

A 6% cap rate means the property's net operating income is 6% of its price each year, before any mortgage. A 6% 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% cap rate on a $300,000 property

To trade at a 6% cap rate, a $300,000 rental needs $18,000 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 $2,470 a month (0.82% of price, a gross rent multiplier of 10.1)
Gross scheduled income of $29,640, $28,158 after vacancy
Operating expenses of $10,168 (36% of collected income)
Net operating income of $17,990, or $1,499 a month

At a 6% cap rate, every $1,000 of annual NOI is worth $16,667 of value. Each $100 a month of rent, after vacancy and percentage expenses, adds about $15,580 to what the property is worth. Each $1,000 a year of expense removes $16,667.

Rent needed for a 6% 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%	Rent needed	Rent / price
$100k	$6,000	$825	0.83%
$150k	$9,000	$1,235	0.82%
$200k	$12,000	$1,645	0.82%
$250k	$15,000	$2,060	0.82%
$300k	$18,000	$2,470	0.82%
$350k	$21,000	$2,885	0.82%
$400k	$24,000	$3,295	0.82%
$500k	$30,000	$4,120	0.82%
$600k	$36,000	$4,940	0.82%
$750k	$45,000	$6,180	0.82%
$1m	$60,000	$8,235	0.82%

What NOI is worth at 6% versus nearby cap rates

The same income, valued at 5.5%, 6%, 6.5%. This is the spread a buyer and seller argue over.

Annual NOI	Value at 5.5%	Value at 6%	Value at 6.5%
$10,000	$181,818	$166,667	$153,846
$15,000	$272,727	$250,000	$230,769
$20,000	$363,636	$333,333	$307,692
$25,000	$454,545	$416,667	$384,615
$30,000	$545,455	$500,000	$461,538
$40,000	$727,273	$666,667	$615,385
$50,000	$909,091	$833,333	$769,231

Check your own property against 6%

The calculator is loaded with the example above and a 6% target. Replace the numbers with yours to see the value your NOI supports at 6%.

Cap rate

6.00%

Moderate

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

$17,990 NOI / $300,000 price

Net operating income

Gross scheduled income: $29,640
Vacancy: -$1,482
Effective gross income: $28,158
Taxes and insurance: -$5,100
Maintenance, reserves, management: -$5,068
Net operating income: $17,990
Monthly NOI: $1,499
Expense ratiooperating expenses / collected income: 36%

At a 6.00% cap rate

Value of this NOI: $299,826
Priced above that by: $174
NOI needed at this price: $18,000
Rent needed at this pricevs $2,470 now: $2,471

Other screens

Gross rent multiplierprice / annual gross rent: 10.1
Rent to pricemonthly rent / price. The 1% rule.: 0.82%
Each $100/mo of rent is worthof value at the target cap rate: $15,580
Each $1,000/yr of expense costsof value at the target cap rate: $16,667

6% cap rate questions

Is a 6% cap rate good?

In most markets, yes. A 6% 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% 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% cap rate on a $300,000 property?

About $2,470 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 $18,000 of NOI, which is 6% of $300,000.

What is a property with $20,000 of NOI worth at a 6% cap rate?

$333,333. Divide NOI by the cap rate as a decimal: $20,000 / 0.06 = $333,333. At a 6% cap rate, each $1,000 of annual NOI is worth $16,667.