Cap rate formula
NOI = (rent + other income) × 12 × (1 − vacancy) − operating expenses
Cap rate = NOI ÷ property value × 100
Example: $2,400 rent with 5% vacancy is $27,360 of effective income a year. Subtracting $10,288.80 of expenses (tax, insurance, repairs, 8% management and other costs) leaves NOI of $17,071.20, a cap rate of 5.69% on a $300,000 price.
Using cap rate wisely
- Compare cap rates only between similar properties in similar areas.
- Use realistic expenses. Underestimating repairs or vacancy makes any deal look good.
- The 1% rule (monthly rent at least 1% of the price) is a quick screen, but always check the full numbers.
- Cash flow after the mortgage matters for your budget: high rates can turn a decent cap rate into negative cash flow.
Related tools: mortgage calculator, ROI calculator and rent vs buy calculator.
Last reviewed October 2026.
Frequently asked questions
What is a cap rate?
The capitalization rate is a rental property's net operating income (NOI) for a year divided by its price or value. It shows the return you would earn if you bought the property with cash, before financing. A $300,000 property with $18,000 NOI has a 6% cap rate.
What is net operating income?
NOI is the rent you actually collect (after vacancies) plus other income, minus operating expenses such as property tax, insurance, repairs and maintenance, property management, HOA, utilities you pay and reserves. It does not include mortgage payments, depreciation or income tax.
What is a good cap rate?
Many investors see 5% to 10% as a typical range, but it depends on the market and risk. Prime properties in expensive cities often trade at 4% to 5%, while higher-risk or smaller markets may offer 8% to 12%. A higher cap rate means more income per dollar, but often more risk.
Cap rate vs cash-on-cash return?
Cap rate ignores financing. Cash-on-cash return divides your yearly cash flow after the mortgage by the cash you actually invested (down payment and closing costs). Enter loan details to see both.
What is the gross rent multiplier?
GRM is the price divided by yearly gross rent. It is a quick screening number: lower is usually better. It ignores expenses, so always follow up with the cap rate.