What a 8% Cap Rate Means for a Rental Property

A 8% cap rate means the property's net operating income is 8% of its price each year, before any mortgage. A 8% cap rate is high. It is common in low-cost markets, older housing stock and small multifamily, and it usually comes with more turnover, more repairs or slower appreciation. The income is attractive if the expense assumptions hold.

A 8% cap rate on a $300,000 property

To trade at a 8% cap rate, a $300,000 rental needs $24,000 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 $3,115 a month (1.04% of price, a gross rent multiplier of 8.0)
Gross scheduled income of $37,380, $35,511 after vacancy
Operating expenses of $11,492 (32% of collected income)
Net operating income of $24,019, or $2,002 a month

At a 8% cap rate, every $1,000 of annual NOI is worth $12,500 of value. Each $100 a month of rent, after vacancy and percentage expenses, adds about $11,685 to what the property is worth. Each $1,000 a year of expense removes $12,500.

Rent needed for a 8% 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 8%	Rent needed	Rent / price
$100k	$8,000	$1,040	1.04%
$150k	$12,000	$1,555	1.04%
$200k	$16,000	$2,075	1.04%
$250k	$20,000	$2,595	1.04%
$300k	$24,000	$3,115	1.04%
$350k	$28,000	$3,630	1.04%
$400k	$32,000	$4,150	1.04%
$500k	$40,000	$5,190	1.04%
$600k	$48,000	$6,225	1.04%
$750k	$60,000	$7,780	1.04%
$1m	$80,000	$10,375	1.04%

What NOI is worth at 8% versus nearby cap rates

The same income, valued at 7.5%, 8%, 9%. This is the spread a buyer and seller argue over.

Annual NOI	Value at 7.5%	Value at 8%	Value at 9%
$10,000	$133,333	$125,000	$111,111
$15,000	$200,000	$187,500	$166,667
$20,000	$266,667	$250,000	$222,222
$25,000	$333,333	$312,500	$277,778
$30,000	$400,000	$375,000	$333,333
$40,000	$533,333	$500,000	$444,444
$50,000	$666,667	$625,000	$555,556

Check your own property against 8%

The calculator is loaded with the example above and a 8% target. Replace the numbers with yours to see the value your NOI supports at 8%.

Cap rate

8.01%

High

High. Cash-flow markets, older stock, or small multifamily. Check the expense assumptions and the neighborhood.

$24,019 NOI / $300,000 price

Net operating income

Gross scheduled income: $37,380
Vacancy: -$1,869
Effective gross income: $35,511
Taxes and insurance: -$5,100
Maintenance, reserves, management: -$6,392
Net operating income: $24,019
Monthly NOI: $2,002
Expense ratiooperating expenses / collected income: 32%

At a 8.00% cap rate

Value of this NOI: $300,238
Priced below that by: $238
NOI needed at this price: $24,000
Rent needed at this pricevs $3,115 now: $3,113

Other screens

Gross rent multiplierprice / annual gross rent: 8.0
Rent to pricemonthly rent / price. The 1% rule.: 1.04%
Each $100/mo of rent is worthof value at the target cap rate: $11,685
Each $1,000/yr of expense costsof value at the target cap rate: $12,500

8% cap rate questions

Is a 8% cap rate good?

In most markets, yes. A 8% 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 8% cap rate in a 5% market is a bargain, while in a 9% market it is expensive.

What rent do I need for a 8% cap rate on a $300,000 property?

About $3,115 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 $24,000 of NOI, which is 8% of $300,000.

What is a property with $20,000 of NOI worth at a 8% cap rate?

$250,000. Divide NOI by the cap rate as a decimal: $20,000 / 0.08 = $250,000. At a 8% cap rate, each $1,000 of annual NOI is worth $12,500.