What is a good cap rate for rental property?

A "good" cap rate depends on your market and strategy. In gateway cities like San Francisco or New York, 3-5% is typical. In secondary markets, 5-7% is common. Cash-flow-focused investors in the Midwest or South often target 7-10%.

What is the cap rate formula?

Cap Rate = Net Operating Income (NOI) / Purchase Price × 100. NOI is your annual rental income minus all operating expenses (property taxes, insurance, maintenance, management) but excluding mortgage payments.

Does cap rate include mortgage payments?

No. Cap rate measures the unlevered return on a property — it ignores how you finance the purchase. This makes it useful for comparing properties regardless of financing. Use cash-on-cash return to factor in your mortgage.

How do you calculate cap rate?

Calculate net operating income (NOI) by subtracting annual operating expenses and a vacancy allowance from gross rental income, then divide NOI by the purchase price and multiply by 100. For example, $21,000 NOI on a $300,000 property is a 7.0% cap rate.

Cap Rate Calculator

Capitalization rate measures the unlevered return on a property relative to its purchase price. It's the fastest way to compare deals across markets, property types, and price points.

Property

Purchase Price

Annual Gross Rental Income

Total rent collected per year before any deductions

Vacancy Rate

Annual Operating Expenses

Do not include mortgage payments — cap rate measures unlevered return.

Property Taxes

Insurance

Maintenance & Repairs

Property Management

Typically 8-10% of gross rent

Other (HOA, Utilities, etc.)

Results

Cap Rate

0.00%

Effective Gross Income$0

Total Operating Expenses($0)

Net Operating Income (NOI)$0

Expense Ratio0.0%

Cap Rate = NOI / Purchase Price × 100

How to Calculate Cap Rate (Formula & Example)

The calculator above runs the numbers instantly, but the cap rate formula is simple enough to do by hand. Cap rate is a property's net operating income (NOI) divided by its purchase price, expressed as a percentage:

Cap Rate = (Net Operating Income ÷ Purchase Price) × 100

Step 1 — Find effective gross income. Add up the annual rent the property collects, then subtract a vacancy allowance (5% is a reasonable default) to reflect months the unit sits empty.

Step 2 — Subtract operating expenses to get NOI. Deduct property taxes, insurance, maintenance, and management from effective gross income. Do not include mortgage payments — cap rate measures the property's return before financing.

Step 3 — Divide NOI by the purchase price. Multiply by 100 to get a percentage.

Worked example

You're evaluating a $300,000 rental that brings in $30,000 a year in gross rent. After a 5% vacancy allowance ($1,500), effective gross income is $28,500. Operating expenses run $7,500, leaving an NOI of $21,000. Dividing $21,000 by $300,000 gives a cap rate of 7.0% — a solid cash-flow number for most secondary markets.

Want the deeper context behind the number? Read Cap Rate Explained, compare it with another key metric in Cash-on-Cash Return vs. Cap Rate, or see how falling cap rates affect value in Cap Rate Compression Explained.

How to Use the Cap Rate Calculator

1. Enter the purchase price — the total acquisition cost of the property (or current market value if you already own it).

2. Enter annual gross rent — the total rent you expect to collect each year before any deductions.

3. Adjust the vacancy rate — 5% is a reasonable default for stable markets, but adjust up for higher-risk areas or turnover-heavy properties.

4. Enter operating expenses — property taxes, insurance, maintenance, and management fees. Do not include mortgage payments — cap rate measures the property's return before financing.

What Is a Good Cap Rate?

There's no single “good” cap rate — it depends on your strategy, market, and risk tolerance:

Cap Rate	Typical Market	Investor Profile
3-5%	Gateway cities (SF, NYC, LA)	Appreciation-focused, lower risk
5-7%	Secondary markets, suburbs	Balanced cash flow + growth
7-10%	Midwest, South, tertiary markets	Cash-flow focused
10%+	High-risk or distressed areas	Experienced investors, value-add

Cap Rate vs. Cash-on-Cash Return

Cap rate and cash-on-cash return are both essential metrics, but they measure different things:

Cap rate ignores financing. It tells you how the property performs regardless of how you pay for it.
Cash-on-cash return factors in your mortgage. It tells you how your invested cash is performing.

Use cap rate to compare properties. Use cash-on-cash to evaluate how a specific deal works with your financing.

Cap Rate With a Mortgage

A question we get constantly: does cap rate include the mortgage? No — cap rate deliberately ignores financing so you can compare properties on equal footing, whether you pay cash or borrow. Two investors buying the same building get the same cap rate even with very different loans.

To see how a mortgage changes your actual return, run the numbers in two passes. Use this cap rate calculator to judge the property, then layer in your financing with the cash-on-cash return calculator and the mortgage & DSCR calculator. Leverage can lift a 6% cap-rate property to a double-digit cash-on-cash return — or erase it entirely if the monthly payment outruns your net operating income.