Cap Rate Calculator: The One Number That Tells You If a Rental Property Is Worth Buying

Cap rate is what real estate investors use to compare properties the way stock investors use P/E ratios. It strips out financing and tells you the income a property generates relative to its price.

A 7% cap rate means the property produces 7 cents in net operating income for every dollar of value. Compare that to a savings account at 4.5% or a 10-year Treasury at 4.3%, and you can make an informed decision.

The Cap Rate Formula

Cap Rate = Net Operating Income / Property Value

Net Operating Income (NOI) = Gross Rent - Vacancy Loss - Operating Expenses

Operating expenses include:

• Property taxes
• Insurance
• Property management fees
• Maintenance and repairs
• Utilities paid by landlord
• HOA fees

Operating expenses do NOT include:

• Mortgage payments (debt service)
• Capital expenditures (major improvements)
• Depreciation

The exclusion of debt service is deliberate. Cap rate measures the property's income performance, not the investor's financing structure. Two investors can buy the same property at the same price with 20% down or 50% down. The cap rate is identical for both.

Worked Example

A $350,000 triplex with market rents of $900/unit ($2,700/month total):

| Revenue | Annual | |---------|--------| | Gross Rent | $32,400 | | Vacancy (7%) | -$2,268 | | Effective Gross Income | $30,132 |

| Operating Expenses | Annual | |-------------------|--------| | Property taxes | $4,200 | | Insurance | $1,800 | | Property management (9%) | $2,712 | | Maintenance reserve | $3,500 | | Total Operating Expenses | $12,212 |

Net Operating Income: $30,132 - $12,212 = $17,920

Cap Rate: $17,920 / $350,000 = 5.12%

What Different Cap Rates Signal

| Cap Rate | What It Usually Means | |----------|----------------------| | 2-4% | Prime location, high appreciation expected, low income return (NYC, SF, LA) | | 4-6% | Major metro suburbs, moderate income, some appreciation | | 6-8% | Secondary cities, solid income return, moderate appreciation | | 8-10% | Smaller cities, high income, lower appreciation | | 10%+ | Higher risk, lower-demand markets, or distressed properties |

Cap rates have an inverse relationship with property values. When prices rise and rents stay flat, cap rates compress. When prices fall or rents rise, cap rates expand.

Cap Rate vs. Cash-on-Cash Return

These are different metrics that answer different questions.

Cap rate: What does this property produce, ignoring financing?

Cash-on-cash return: What do I, specifically, earn on my cash investment given my financing terms?

Same property, two investors:

Investor A: $350,000 price, 20% down ($70,000), NOI $17,920, mortgage payment $21,600/year.

• Annual cash flow: $17,920 - $21,600 = -$3,680 (negative)
• Cash-on-cash: -$3,680 / $70,000 = -5.3%

Investor B: Same property, 50% down ($175,000), mortgage payment $13,200/year.

• Annual cash flow: $17,920 - $13,200 = $4,720
• Cash-on-cash: $4,720 / $175,000 = 2.7%

Cap rate: 5.12% for both. The property is the same. The investors' actual returns differ entirely based on financing.

Using Cap Rate to Value a Property

If you know the market cap rate and the NOI, you can calculate fair market value:

Property Value = NOI / Market Cap Rate

Example: You are evaluating a small apartment building generating $40,000 in NOI. The prevailing cap rate for similar buildings in this market is 6%.

Fair value = $40,000 / 0.06 = $666,667

If the seller is asking $750,000, the property is overpriced at current rents. Either negotiate a lower price, or model rent increases that justify the ask.

This is how commercial real estate appraisals work. It is also how investors identify mispriced properties.

Market Cap Rates by Asset Type (2026)

Different property types trade at different cap rates in the same market:

| Property Type | Typical Cap Rate Range | |--------------|----------------------| | Class A multifamily (major metros) | 3.5-5% | | Class B multifamily (secondary markets) | 5-7% | | Single-family rentals | 4-7% | | Strip retail (anchored) | 5.5-7% | | Industrial / warehouse | 5-6.5% | | Office (suburban) | 6-8% | | Self-storage | 5-7% |

Office and retail properties currently trade at higher cap rates partly due to vacancy risk and the shift in how people use commercial space.

Limitations of Cap Rate

It uses current income. A property in a rapidly appreciating rent market may look like a poor cap rate today but be attractive in 3 years when rents are 20% higher. Cap rate is a snapshot, not a forecast.

It relies on honest NOI. A seller presenting numbers with understated expenses or overstated occupancy produces an artificially low cap rate, making the property look more attractive than it is. Verify every line of the income statement.

It does not account for CapEx timing. A building needing a new roof in year 2 has significant pending capital expenditure. The cap rate does not capture this.

Markets and submarkets differ. A 6% cap rate in Columbus, Ohio and a 6% cap rate in Charlotte, North Carolina are not equivalent investments. Local demand drivers, population growth, and market liquidity matter.

Frequently Asked Questions

Can I apply cap rate to single-family homes?

Yes, though it is less standard. For single-family rentals, cash-on-cash and gross rent multiplier are more commonly used. Cap rate works but small errors in expense estimation create large swings in the rate because the absolute numbers are smaller.

What cap rate should I target for a first investment property?

In 2026 markets, achieving a 6%+ cap rate on residential property in a growth market is strong. Many experienced investors accept 4.5-5.5% in high-quality locations where appreciation compensates for lower immediate income. Your financing cost determines whether any particular cap rate works for your goals.

Is there a cap rate calculator I can use?

Run your numbers through the CalcMoney Investment Return Calculator to model different scenarios including expense assumptions and price sensitivity.