What Is Cap Rate? The Yield That Prices Rental Property
Cap rate is a property's net operating income divided by its price. What it measures, what it ignores, a worked example, why it moves opposite to price, and when it is the right number to use.
By the CapRateCalculator.co team · Published September 5, 2026
Cap rate is a property’s net operating income divided by its price. A rental producing $18,270 of NOI on a $300,000 price has a cap rate of 6.1%. It is the yield the property would pay if you bought it for cash, and it is the number the market uses to turn income into value.
The name is short for capitalization rate: the rate at which a stream of income is capitalized into a lump-sum price.
The formula
Cap rate = net operating income / purchase price
Net operating income is rent and other income, minus vacancy, minus operating expenses. Operating expenses include taxes, insurance, HOA, maintenance, capital reserves and management. They do not include the mortgage. The cap rate formula guide works through each line.
A worked example
A $300,000 single-family rental leases for $2,500 a month, or $30,000 a year. Allow 5% for vacancy and you collect $28,500.
Property taxes are $3,600, insurance is $1,500, and you budget 18% of collected rent for maintenance, capital reserves and management, about $5,130. Operating expenses total $10,230, which is 36% of collected income.
Net operating income is $28,500 minus $10,230, or $18,270. Divided by $300,000, the cap rate is 6.1%.
No loan appeared anywhere in that calculation. A buyer paying cash and a buyer with 25% down both see a 6.1% cap rate. What they earn on their own money differs, and that is a different metric.
What cap rate is for
Comparing properties. A $180,000 duplex and a $600,000 fourplex can be compared on cap rate because financing and price scale are out of the picture. If one yields 7.5% and the other 5%, you know which produces more income per dollar.
Pricing. Rearrange the formula and value equals NOI divided by cap rate. If comparable rentals in a market sell at a 6% cap rate and a property produces $18,270 of NOI, it is worth about $304,500. Appraisers and brokers value income property this way. The valuation guide covers it.
Reading a market. Cap rates fall when buyers compete for safe, appreciating property and rise when they demand more income for more risk. A 4% cap rate market and a 9% cap rate market are telling you different things about growth and risk before you look at a single listing.
What cap rate ignores
Financing. Two buyers at the same cap rate can earn very different returns on cash depending on their loans. Cap rate vs cash on cash return explains how they split.
Growth. Cap rate is a one-year snapshot. A 4% cap rate with rents growing 5% a year can beat an 8% cap rate in a flat market over a decade. Cap rate does not know which one it is looking at.
Capital condition. A property with a new roof and one that needs a roof next year can show the same NOI and the same cap rate. Reserves in the expense line help. An inspection tells you the rest.
Taxes and appreciation. Depreciation, income tax and the eventual sale price are all outside the formula.
Why cap rate and price move in opposite directions
Because price is NOI divided by cap rate. For the same income, a lower cap rate means a higher price and a higher cap rate means a lower one.
$18,270 of NOI is worth $365,400 at a 5% cap rate, $304,500 at 6%, and $228,375 at 8%. Nothing about the property changed across those three numbers. Only what buyers were willing to pay for a dollar of its income.
This is why “cap rates compressed” is good news for owners and bad news for buyers, and why a market where cap rates are rising is one where prices are falling relative to rent.
Where cap rates land
Most US residential rentals trade between 4% and 8%. Under 4% is typical of expensive coastal metros. 4 to 6% covers most large cities. 6 to 8% is mid-priced and secondary markets. Above 8% is low-cost markets, older stock and small multifamily, usually with more risk attached.
The what is a good cap rate guide goes through each band, and the cap rate pages show the rent and value behind every rate from 3% to 12%.
A note on the 1% rule
Investors sometimes screen properties by whether monthly rent is 1% of price. Under typical expense assumptions, a property at the 1% rule produces a cap rate around 7 to 8%. At 0.7% of price it is around 4 to 5%. The rule is a rough proxy for cap rate that skips the expense math. The cap rate vs gross rent multiplier guide covers when that shortcut is safe and when it is not.
The cap rate calculator builds the full NOI and shows the cap rate, the value at any target rate, and the rent it would take to justify a price.
Frequently asked questions
Is a higher cap rate better?
For a buyer, a higher cap rate means more income per dollar of price, so yes in isolation. But the market sets cap rates by risk and growth. A high cap rate usually signals a cheaper market, an older property, or weaker tenants. The question is whether the cap rate is high for that market and property type.
Does cap rate include the mortgage?
No. Cap rate is computed on net operating income, which is before debt service. That is the point: it lets two buyers with different loans compare the same property on equal terms.
Is cap rate the same as ROI?
No. Cap rate is the property's unleveraged income yield in one year. ROI on a rental usually means your total return on the cash you invested, including financing, appreciation and loan paydown. Cap rate is one input to that, not the whole answer.
What cap rate do lenders look at?
Commercial lenders use cap rate to check the appraised value and to confirm the property produces enough NOI to cover the loan, usually with a debt service coverage ratio of 1.20 to 1.25. Residential lenders on one to four unit rentals rarely reference cap rate directly.