Calculate capitalization rate (cap rate) for investment properties. Evaluate whether a property generates sufficient returns relative to its market value.
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Typical vacancy loss (5–10% for single-family; 5–15% for multifamily).
A 6.55% cap rate is reasonable in most US markets. The GRM of 11.1 means the property costs about 11× its annual gross rent.
Cap Rate: An Income Yield That Ignores Your Mortgage
A yield that strips out financing
The capitalisation rate measures a property’s income yield independent of how it is paid for: net operating income divided by price, as a percentage. Its defining feature is that it deliberately ignores your mortgage, so two investors looking at the same building get the same cap rate regardless of their loans.
That is precisely what makes it a fair comparison tool. It describes the asset itself — useful for screening properties quickly and sanity-checking an asking price — while your financing is analysed separately.
NOI is rent minus vacancy minus operating expenses
Net operating income builds up in steps: start with gross rent, subtract a vacancy allowance to get effective gross income, then subtract operating expenses — property tax, insurance, maintenance, management. The cap rate is that NOI divided by the property value.
The one rule that matters most: mortgage payments are not operating expenses. Debt service is left out of NOI on purpose, which is what keeps the cap rate about the property rather than your loan. The tool also shows the gross rent multiplier as a rougher, faster screen.
There is no universal 'good' cap rate
A higher cap rate means a higher income yield, but it usually comes bundled with more risk or less expected appreciation; a lower cap rate signals a pricier, often steadier market where buyers accept a smaller yield for stability and growth. Neither is automatically better.
So a 5% cap rate can be excellent in a prime coastal city and poor in a small rural town. The number is only meaningful against other properties of the same type in the same market.
Two mistakes that flatter the number
The biggest error is folding the mortgage into expenses, which deflates NOI and breaks the comparison entirely — keep debt service out. The second is understating expenses: owners routinely forget maintenance reserves, capital expenditures, and management, which makes the yield look better than reality. A realistic expense load is often 30 to 50 percent of rent.
Both errors point the same way — toward an optimistic cap rate that does not survive contact with the actual operating statement.
Use it to back into value — then check cash-on-cash
Cap rate works in reverse, too. If similar buildings trade around a 7% cap rate, divide a property’s NOI by 0.07 to estimate what it should be worth, then compare that to the asking price. It is a quick valuation cross-check.
But cap rate is a current-income snapshot. It ignores rent growth, appreciation, the tax shield of depreciation, and the equity you build paying down a loan, so it understates the full return on a leveraged purchase. Pair it with a cash-on-cash analysis, and confirm the numbers with a qualified professional before committing.
Assumptions & Best Uses
NOI excludes mortgage/debt service — cap rate is a property-level metric independent of financing.
Operating expenses include property taxes, insurance, maintenance, repairs, and management fees (~30–50% of gross rents is typical).
Limitations
Cap rate ignores financing leverage — the same property can have a very different cash-on-cash return depending on mortgage terms.
Does not model appreciation, tax benefits (depreciation), or equity buildup.
Cap rate is backward-looking (based on current income) — future NOI growth is not included.
Frequently Asked Questions
What is a good cap rate for rental property?
It depends on location and risk tolerance. In major metros (NYC, SF, LA), 3–5% cap rates are common and accepted. In mid-tier cities, 6–8% is typical. In rural or high-risk areas, 9%+ compensates for risk. As a rule: lower cap rate = safer market with more appreciation potential; higher cap rate = higher yield but more risk/less appreciation.
What is the difference between cap rate and cash-on-cash return?
Cap rate ignores financing — it’s NOI / property value. Cash-on-cash return accounts for your actual mortgage: it’s annual pre-tax cash flow / actual cash invested (down payment + closing costs). A 6% cap rate property with 30% down and 6.5% mortgage might have a 2–4% cash-on-cash return.
Why are mortgage payments excluded from NOI?
NOI is a property-level metric that measures the income-generating power of the property itself, independent of how it’s financed. Two investors buying the same property — one with cash, one with a mortgage — have the same NOI but very different cash flows. This allows cap rate to be a universal comparison tool.
What is the gross rent multiplier (GRM)?
GRM = Property Price / Annual Gross Rent. It’s a quick filter: a $400K property renting for $36K/year has a GRM of 11.1. Multiply months of rent to get a GRM in months: 133 months ≈ 11.1 years. Lower GRM = better price relative to rent. GRM ignores expenses and vacancy — use cap rate for deeper analysis.
How does raising the cap rate change a property’s value?
Value and cap rate move in opposite directions for a given income. If a property produces $26,000 of NOI, it is worth about $433,000 at a 6% cap rate but only about $325,000 at an 8% cap rate. When buyers demand higher cap rates — often because rates rise or a market feels riskier — prices fall even if rents do not change. This is why commercial values are so sensitive to the cap rate environment.
Should I use my purchase price or current market value?
Both are useful for different questions. Using your purchase price tells you the yield on what you actually paid. Using current market value tells you the yield a new buyer would get today, which matters when deciding whether to hold or sell. The two cap rates diverge as the property appreciates, so be clear about which one you are computing.
Sources & References
Figures on this page are checked against primary, authoritative sources. Links open in a new tab.
Returns are assumptions, not guarantees. Actual results may vary because of market performance, taxes, fees, inflation, and timing. This is an educational projection, not investment advice.
Published the calculator with its formula, worked example, assumptions, limitations and FAQs, and added an automated formula test suite covering it.
Surfaced the implied valuation at an 8% cap rate, which the page had been calculating but never displaying, so the effect of a shift in market cap rates is now visible alongside the 6% figure.
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