What a 7% Cap Rate Means for a Rental Property

A 7% cap rate means the property's net operating income is 7% of its price each year, before any mortgage. A 7% 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% cap rate on a $300,000 property

To trade at a 7% cap rate, a $300,000 rental needs $21,000 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 $2,790 a month (0.93% of price, a gross rent multiplier of 9.0)
Gross scheduled income of $33,480, $31,806 after vacancy
Operating expenses of $10,825 (34% of collected income)
Net operating income of $20,981, or $1,748 a month

At a 7% cap rate, every $1,000 of annual NOI is worth $14,286 of value. Each $100 a month of rent, after vacancy and percentage expenses, adds about $13,354 to what the property is worth. Each $1,000 a year of expense removes $14,286.

Rent needed for a 7% 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%	Rent needed	Rent / price
$100k	$7,000	$930	0.93%
$150k	$10,500	$1,395	0.93%
$200k	$14,000	$1,860	0.93%
$250k	$17,500	$2,325	0.93%
$300k	$21,000	$2,790	0.93%
$350k	$24,500	$3,255	0.93%
$400k	$28,000	$3,725	0.93%
$500k	$35,000	$4,655	0.93%
$600k	$42,000	$5,585	0.93%
$750k	$52,500	$6,980	0.93%
$1m	$70,000	$9,305	0.93%

What NOI is worth at 7% versus nearby cap rates

The same income, valued at 6.5%, 7%, 7.5%. This is the spread a buyer and seller argue over.

Annual NOI	Value at 6.5%	Value at 7%	Value at 7.5%
$10,000	$153,846	$142,857	$133,333
$15,000	$230,769	$214,286	$200,000
$20,000	$307,692	$285,714	$266,667
$25,000	$384,615	$357,143	$333,333
$30,000	$461,538	$428,571	$400,000
$40,000	$615,385	$571,429	$533,333
$50,000	$769,231	$714,286	$666,667

Check your own property against 7%

The calculator is loaded with the example above and a 7% target. Replace the numbers with yours to see the value your NOI supports at 7%.

Cap rate

6.99%

Solid

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

$20,981 NOI / $300,000 price

Net operating income

Gross scheduled income: $33,480
Vacancy: -$1,674
Effective gross income: $31,806
Taxes and insurance: -$5,100
Maintenance, reserves, management: -$5,725
Net operating income: $20,981
Monthly NOI: $1,748
Expense ratiooperating expenses / collected income: 34%

At a 7.00% cap rate

Value of this NOI: $299,727
Priced above that by: $273
NOI needed at this price: $21,000
Rent needed at this pricevs $2,790 now: $2,792

Other screens

Gross rent multiplierprice / annual gross rent: 9.0
Rent to pricemonthly rent / price. The 1% rule.: 0.93%
Each $100/mo of rent is worthof value at the target cap rate: $13,354
Each $1,000/yr of expense costsof value at the target cap rate: $14,286

7% cap rate questions

Is a 7% cap rate good?

In most markets, yes. A 7% 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% 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% cap rate on a $300,000 property?

About $2,790 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 $21,000 of NOI, which is 7% of $300,000.

What is a property with $20,000 of NOI worth at a 7% cap rate?

$285,714. Divide NOI by the cap rate as a decimal: $20,000 / 0.07 = $285,714. At a 7% cap rate, each $1,000 of annual NOI is worth $14,286.