What a 7.5% Cap Rate Means for a Rental Property

A 7.5% cap rate means the property's net operating income is 7.5% of its price each year, before any mortgage. A 7.5% 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 7.5% cap rate on a $300,000 property

To trade at a 7.5% cap rate, a $300,000 rental needs $22,500 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 $2,955 a month (0.98% of price, a gross rent multiplier of 8.5)
Gross scheduled income of $35,460, $33,687 after vacancy
Operating expenses of $11,164 (33% of collected income)
Net operating income of $22,523, or $1,877 a month

At a 7.5% cap rate, every $1,000 of annual NOI is worth $13,333 of value. Each $100 a month of rent, after vacancy and percentage expenses, adds about $12,464 to what the property is worth. Each $1,000 a year of expense removes $13,333.

Rent needed for a 7.5% 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 7.5%	Rent needed	Rent / price
$100k	$7,500	$985	0.98%
$150k	$11,250	$1,475	0.98%
$200k	$15,000	$1,970	0.98%
$250k	$18,750	$2,460	0.98%
$300k	$22,500	$2,955	0.98%
$350k	$26,250	$3,445	0.98%
$400k	$30,000	$3,935	0.98%
$500k	$37,500	$4,920	0.98%
$600k	$45,000	$5,905	0.98%
$750k	$56,250	$7,380	0.98%
$1m	$75,000	$9,840	0.98%

What NOI is worth at 7.5% versus nearby cap rates

The same income, valued at 7%, 7.5%, 8%. This is the spread a buyer and seller argue over.

Annual NOI	Value at 7%	Value at 7.5%	Value at 8%
$10,000	$142,857	$133,333	$125,000
$15,000	$214,286	$200,000	$187,500
$20,000	$285,714	$266,667	$250,000
$25,000	$357,143	$333,333	$312,500
$30,000	$428,571	$400,000	$375,000
$40,000	$571,429	$533,333	$500,000
$50,000	$714,286	$666,667	$625,000

Check your own property against 7.5%

The calculator is loaded with the example above and a 7.5% target. Replace the numbers with yours to see the value your NOI supports at 7.5%.

Cap rate

7.51%

Solid

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

$22,523 NOI / $300,000 price

Net operating income

Gross scheduled income: $35,460
Vacancy: -$1,773
Effective gross income: $33,687
Taxes and insurance: -$5,100
Maintenance, reserves, management: -$6,064
Net operating income: $22,523
Monthly NOI: $1,877
Expense ratiooperating expenses / collected income: 33%

At a 7.50% cap rate

Value of this NOI: $300,311
Priced below that by: $311
NOI needed at this price: $22,500
Rent needed at this pricevs $2,955 now: $2,953

Other screens

Gross rent multiplierprice / annual gross rent: 8.5
Rent to pricemonthly rent / price. The 1% rule.: 0.98%
Each $100/mo of rent is worthof value at the target cap rate: $12,464
Each $1,000/yr of expense costsof value at the target cap rate: $13,333

7.5% cap rate questions

Is a 7.5% cap rate good?

In most markets, yes. A 7.5% 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 7.5% cap rate in a 5% market is a bargain, while in a 9% market it is expensive.

What rent do I need for a 7.5% cap rate on a $300,000 property?

About $2,955 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 $22,500 of NOI, which is 7.5% of $300,000.

What is a property with $20,000 of NOI worth at a 7.5% cap rate?

$266,667. Divide NOI by the cap rate as a decimal: $20,000 / 0.075 = $266,667. At a 7.5% cap rate, each $1,000 of annual NOI is worth $13,333.