Calculate the capitalization rate for any rental property. Enter your Net Operating Income and property value to see your cap rate instantly.
Strong cap rate. This property generates excellent income relative to its value. Typical of cash flow markets like the Midwest and South.
What is Cap Rate in Real Estate?
Capitalization rate, or cap rate, is one of the most fundamental metrics in real estate investing. It measures the annual return a property generates based on its net operating income relative to its current market value. Cap rate strips away financing variables like mortgages and down payments, giving you a pure comparison of how much income a property produces per dollar of value.
This makes cap rate ideal for comparing properties against each other, even when they have different financing structures. Two properties in the same market with different mortgage terms can be compared on equal footing using cap rate.
How to Calculate Cap Rate
Cap Rate = (Net Operating Income / Property Value) x 100
For example: A property generates $12,000 in annual NOI (rent minus operating expenses like taxes, insurance, maintenance, and vacancy) and is worth $150,000. The cap rate is ($12,000 / $150,000) x 100 = 8.0%. This means the property returns 8% of its value each year in net income before debt service.
Note that NOI does not include mortgage payments. It only includes operating expenses: property taxes, insurance, maintenance, property management, vacancy loss, and utilities paid by the landlord. This is intentional — cap rate measures the property's performance, not your financing.
What is a Good Cap Rate?
8%+
Excellent
High cash flow. Typical in Midwest, South, and emerging markets. Higher yield but may have more management intensity.
5-8%
Good
Balanced cash flow and appreciation. Common in stable secondary markets like Columbus, Indianapolis, Kansas City.
3-5%
Moderate
Appreciation-focused. Common in coastal and high-demand markets. Lower immediate cash flow but stronger value growth.
Cap Rate vs Other Metrics
Cap rate is best used alongside other metrics for a complete picture. Cash on cash return accounts for your actual cash invested and financing. DSCR tells you whether income covers debt payments. Together, these three metrics give you a comprehensive view of any deal. Use our free cash on cash calculator and the full becvio platform for complete analysis.
Frequently Asked Questions
What is a good cap rate for rental property?
A good cap rate for rental property typically falls between 5% and 10%. Cap rates of 8%+ are considered excellent for cash flow, while 4-6% is common in appreciating markets. The ideal cap rate depends on your investment strategy, market, and risk tolerance.
How do you calculate cap rate?
Cap rate is calculated by dividing the Net Operating Income (NOI) by the current market value of the property, then multiplying by 100. Formula: Cap Rate = (NOI / Property Value) x 100.
Is a higher cap rate better?
A higher cap rate means better cash flow relative to the property price, but it often comes with higher risk. Premium locations typically have lower cap rates (3-5%) with less risk, while emerging areas offer higher cap rates (8-12%) with more vacancy risk.
What is the difference between cap rate and cash on cash return?
Cap rate measures the return on the total property value regardless of financing, while cash on cash return measures the return on your actual cash invested. Cap rate ignores mortgage payments; cash on cash includes them.
Track This Across Your Entire Portfolio
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