Cap Rate Calculator
Cap rate measures a rental's return independent of how it's financed — the standard first filter investors use to compare deals.
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Cap Rate
7.00%
Net operating income ÷ property price
Benchmark: 0-10%+
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Last updated: August 17, 2026 · Reviewed by the DoCalc team
What Is Cap Rate?
Capitalization rate (cap rate) measures a rental property's annual return based purely on its income and price — deliberately ignoring financing, so it's the standard way investors compare properties regardless of how each one is (or would be) financed. A property bought in cash and one bought with a mortgage have the same cap rate, even though their actual cash returns differ once debt service is factored in (that's what Cash-on-Cash Return measures instead).
The Formula
Operating expenses include property tax, insurance, maintenance, property management, and vacancy loss — but never mortgage principal or interest, which is exactly what makes cap rate financing-independent.
Worked Example
A $300,000 rental generating $30,000/year in gross rent with $9,000/year in operating expenses has a NOI of $21,000. Cap rate = $21,000 ÷ $300,000 = 7.0%, generally considered a solid return by common real estate benchmarks (though "good" varies significantly by market).
Typical Cap Rate Benchmarks
| Cap rate | General read |
|---|---|
| Under 4% | Low — common in expensive, low-risk markets (e.g. coastal metros) |
| 4-6% | Fair — typical for stable, lower-risk properties |
| 6-8% | Good — solid return, moderate risk |
| 8%+ | Strong — often reflects higher risk or a less competitive market |
These bands are general guidelines, not fixed rules — cap rate norms vary enormously by city, neighborhood, and property type. Always compare a property's cap rate against similar properties in the same specific market.
Pros and Cons of Using Cap Rate
Pros: it's a fast, financing-independent way to compare deals side by side, and the metric every experienced investor already speaks in.
Cons: it ignores financing entirely, so it doesn't tell you your actual cash return if you're using a mortgage — use Cash-on-Cash Return for that. It also doesn't account for appreciation or tax benefits.
Who Should Use This Calculator
Use it if you're comparing multiple rental properties and want a quick, standardized first filter. Pair it with Cash-on-Cash Return once you've narrowed down candidates and want to model your actual out-of-pocket return with financing included.
Frequently Asked Questions
What's a good cap rate for a rental property?
It depends heavily on the market, but 6-8% is commonly considered a solid, moderate-risk return, while under 4% is typical in expensive, low-risk metros and 8%+ often signals either higher risk or a less competitive market.
Does cap rate account for my mortgage payment?
No — cap rate deliberately excludes mortgage principal and interest, so it measures the property's return independent of financing. Use Cash-on-Cash Return to factor in your actual mortgage payment.
Is a higher cap rate always better?
Not necessarily — a high cap rate can also signal higher risk (e.g., a property in a declining area or needing significant repairs), not just a better deal. Always investigate why a cap rate is unusually high.
What expenses count in the NOI calculation?
Property tax, insurance, maintenance, property management fees, and vacancy loss are typical operating expenses. Mortgage payments and capital expenditures (major renovations) are excluded by definition.
How is cap rate different from cash-on-cash return?
Cap rate divides NOI by the full property price, ignoring financing. Cash-on-cash return divides annual cash flow (after debt service) by the actual cash invested — a more personal, financing-specific number.
Can cap rate be used for owner-occupied homes?
Not meaningfully — cap rate assumes the property generates rental income, so it's an investment-property metric, not applicable to a primary residence you live in.