What is Cap Rate?
Cap rate (capitalization rate) measures a rental property's unleveraged annual return: net operating income divided by purchase price. It's the fastest way to compare income properties independent of how they're financed.
Because it ignores your mortgage, cap rate is the number investors and appraisers use to gauge a property's income relative to its price — and to compare one deal against another in the same market.
Formula
Cap rate = Net Operating Income ÷ Purchase Price. NOI = annual rent − operating expenses (taxes, insurance, management, maintenance, vacancy), excluding mortgage payments.
How to read it
- A higher cap rate means more income relative to price — but often signals more risk, more work, or a weaker location.
- Typical ranges run ~4–6% in expensive appreciation metros and ~7–10% in cheaper cash-flow markets.
- Cap rate excludes financing — for the return on the cash you actually invest, use cash-on-cash return.
Frequently asked questions
- What is a good cap rate for rental property?
- It depends on the market. 5–6% is common in appreciation markets; 8%+ usually signals a cash-flow market. Compare against similar local properties rather than a universal target.
- Does cap rate include the mortgage?
- No. Cap rate is unleveraged — it treats the property as if you paid cash. For the return on your actual invested cash after loan payments, use cash-on-cash return.