Financial · Live
Rental property yield,
priced clean.
Find the capitalization rate, net operating income, and annual cash flow of any investment property. The cap rate is the unlevered yield the asset itself produces: the metric professional buyers use to compare deals across markets and across time.
Inputs
Property details
Operating expensesTotal $12,300.00 / yr
Typically 8–12% of annual rent
Set aside for empty months, typically 5–10% of gross
Mortgage (for cash flow)Optional — sets the Annual Cash Flow
Formula
Cap Rate = NOI ⁄ Price × 100
NOI = Annual Rent − Operating Expenses
Capitalization rate
Real-timeStable urban / suburbanSolid markets, lower risk. Returns lean on appreciation rather than yield.
Itemized
Where every dollar goes
| Expense | Annual | Visual |
|---|---|---|
| Property tax | $3,300.00 | |
| Insurance | $1,500.00 | |
| Maintenance | $3,000.00 | |
| Property management | $3,000.00 | |
| Vacancy reserve | $1,500.00 | |
| Total operating expenses | $12,300.00 | OER |
Context
Where this cap rate falls
- 0–4%Trophy / coastal Class-APremium markets, low risk, low yield: cash buyers chasing appreciation.
- 4–6%Stable urban / suburban← youSolid markets, lower risk. Returns lean on appreciation rather than yield.
- 6–8%Healthy yield rangeSweet spot for most buy-and-hold investors: meaningful cash flow, moderate risk.
- 8–12%High yieldOften secondary or tertiary markets, higher tenant turnover, higher reward.
- 12–∞%Risk premium territoryVerify your numbers; this implies serious risk, deferred maintenance, or distressed area.
Gross Rent Multiplier (GRM): 10× : price ÷ annual gross rent. The cap rate's older, cruder cousin: it ignores expenses entirely. Useful only for a rapid sniff test before doing the real work.
Field guide
What the cap rate actually tells you.
The capitalization rate is the rental property's annual yield, computed before any financing. It answers a single question: if I bought this property in cash, what percent of my purchase price would I earn back each year in net rental income?
NOI (net operating income) is the annual gross rent minus all the operating expenses required to keep the property running: taxes, insurance, maintenance, management, vacancy reserve, HOA, and so on. NOI deliberately excludes mortgage payments, depreciation, and income tax. That's the whole point: cap rate measures the asset's economics, not your loan's economics.
The four numbers that determine your cap rate
- Annual gross income. Monthly rent × 12. Pad it down by an honest vacancy assumption; a property advertised as “always full” still has tenant turnover, eviction gaps, and the occasional non-paying month.
- Operating expenses. Property tax, insurance, maintenance, management, vacancy reserve, HOA. Anything required to keep the building open and the tenants happy.
- Net operating income. Gross income minus operating expenses. If this number is negative, the property bleeds cash even before debt service — walk away.
- Purchase price. What you pay for the property. Some analysts use the property's current market value instead, which gives you the cap rate the market is currently paying for that cash flow stream.
What is a good cap rate?
There is no universal answer; a “good” cap rate depends on the market, the property class, the risk you're taking, and the alternative yields available. The most useful framing: cap rate is a price tag for risk. Higher cap rates compensate for higher risk. A 4% cap rate on a Manhattan luxury building and a 12% cap rate on a four-unit walk-up in a small city aren't saying one is better than the other; they're saying the market thinks one is far riskier than the other.
Rough US bands as of the mid-2020s:
- 3–4%: trophy assets in coastal Class-A markets (NYC, San Francisco, central LA). Buyers expect to make money on appreciation, not yield. Often all-cash international or institutional money.
- 4–6%: stable urban and suburban multi-family in major metros. Lower risk, lower yield. Solid but not exciting.
- 6–8%: the sweet spot for most buy-and-hold investors. Meaningful cash flow, moderate risk, common in healthy secondary markets. If your property fits here and the numbers check out, you have a real deal.
- 8–12%: high-yield markets, often tertiary cities or working-class neighborhoods. Higher tenant turnover, more management headache, but real monthly cash flow.
- 12%+: verify your numbers and your assumptions. A cap rate this high implies the market prices in real risk: deferred maintenance, declining area, tenant quality issues, or a too-good-to-be-true listing. Sometimes a real opportunity, often a trap.
Three rules of thumb worth memorising
- Cap rates and prices move in opposite directions. When prices rise faster than rents, cap rates compress. When interest rates rise (raising the cost of capital), cap rates expand and prices fall. The relationship is the heartbeat of commercial real estate.
- Compare cap rates within the same market. The right benchmark for a duplex in Cleveland is other duplexes in Cleveland, not a high-rise in Miami. The risk profiles are completely different.
- Always verify the seller's NOI. Listings routinely inflate gross income and understate expenses, especially maintenance and vacancy. A broker's “7% cap” often becomes a 5% cap once you re-underwrite with realistic numbers.
Cap Rate vs. ROI: what's the difference?
Both are percentages. Both describe returns. They answer very different questions.
| Question | Cap Rate | ROI |
|---|---|---|
| What it measures | Yield of the property itself | Return on the cash you put in |
| Includes financing? | No (unlevered) | Yes (levered; mortgage P&I subtracted from cash flow) |
| Includes appreciation? | No (cash flow only) | Sometimes, depending on whether you sold or just hold |
| Time horizon | Annual snapshot | Period-end vs period-start (any horizon) |
| Best used for | Comparing properties at the moment of purchase | Measuring what your money actually did |
| Formula | NOI ⁄ Purchase Price × 100 | (Final Value − Initial Cost) ⁄ Initial Cost × 100 |
| Affected by your loan? | No | Yes, dramatically |
The takeaway: cap rate is a property metric; ROI is an investor metric. Two investors buying the same building at the same price get the same cap rate. Their ROIs can be wildly different depending on how much they put down, what rate they got, how long they hold, and whether the building appreciates.
The cousin to know: cash-on-cash return
Cash-on-cash return is the leveraged cousin of cap rate, sitting between cap rate and ROI:
Where annual cash flow is NOI minus annual mortgage payments, and cash invested is your down payment plus closing costs. Cash-on-cash tells you what your actual invested dollars are earning each year and because of mortgage leverage, it's often much higher than the cap rate. A 7% cap rate property bought with 25% down at a 6% mortgage rate can easily yield 12–14% cash-on-cash.
Worked example
A small rental property: $300,000 purchase price, $2,500/month rent, all-in operating expenses of $11,300 per year (taxes $3,300 + insurance $1,500 + maintenance $3,000 + management $3,000 + vacancy $1,500).
- Annual gross income:
$2,500 × 12 = $30,000 - NOI:
$30,000 − $11,300 = $18,700 - Cap rate:
$18,700 ⁄ $300,000 × 100 ≈ 6.23% - OER (operating expense ratio):
$11,300 ⁄ $30,000 × 100 ≈ 37.7% - GRM:
$300,000 ⁄ $30,000 = 10.0×
A 6.23% cap rate sits squarely in the “healthy yield” band. Now layer in 20% down ($60,000) on a 30-year mortgage at 7%: P&I is about $1,597/month or $19,162/year. Annual cash flow drops to $18,700 − $19,162 ≈ −$462, slightly negative. The property looks great unlevered and barely breaks even financed at today's rates. That gap is why cap rate alone never tells the full story for a financed buyer.