Once your PRO trial is over you can continue using Landlord Studio GO completely free.
By continuing you agree to our Terms & Conditions.
Please visit our United Kingdom site for a better experience
ContinueLearn the cap rate formula and how to calculate cap rate for rental properties. Includes step-by-step examples, what makes a good cap rate, and free calculator.
The cap rate formula is the most widely used metric for evaluating rental property investments. Whether you're analyzing your first property or your tenth, understanding how to calculate cap rate accurately can make the difference between a profitable investment and a costly mistake.
Cap Rate Formula: Net Operating Income (NOI) ÷ Property Value × 100 = Cap Rate %
In this guide, you'll learn exactly how to calculate cap rate, what the formula means, how to interpret your results, and what constitutes a good cap rate for different property types and markets. We'll walk through real examples so you can apply this immediately to your investment analysis.
Cap Rate = (Net Operating Income ÷ Property Value) × 100
Where:
Example: A property generating $12,000 annual NOI worth $200,000 has a 6% cap rate ($12,000 ÷ $200,000 × 100 = 6%).
Use our free rental yield calculator to instantly calculate cap rate, cash flow, and return on investment for any property.
Calculate Cap Rate Now →Free • No signup required • Instant results
Capitalization rate, often referred to as the cap rate, is a metric used in real estate that indicates the rate of return that is expected from an investment property.
The cap rate is calculated by dividing the property's net operating income (NOI) by the asset value and is expressed as a percentage. This figure assists in gauging the potential return for real estate investors and can also be used to make predictions of the final capitalization rate, or terminal cap rate, when the property is sold.
While the cap rate provides a quick means of comparing similar real estate investments, it's essential to note that it shouldn't stand alone as the sole indicator of an investment's viability. It doesn't consider elements like leverage, the time value of money, or future cash flow from property enhancements, among other significant factors.
The cap rate is one of the most popular metrics investors used to assess a rental property's profitability. Put simply, it represents the yield of a property over a one-year time horizon.
The capitalization rate reflects the property's inherent, unaltered rate of return, independent of leverage.
.jpeg)
Follow this systematic approach to calculate the cap rate for any rental property you're considering. This method ensures you don't miss any critical expenses or income sources.
Start by calculating all potential income the property can generate annually.
Pro Tip: Use market rent rates, not the current tenant's rent, to assess the property's true income potential.
Identify all expenses required to operate and maintain the property. Be comprehensive—missed expenses will inflate your cap rate and mislead your analysis.
Include These Expenses:
DO NOT Include:
Example Total Operating Expenses: $7,200 annually
Subtract your total operating expenses from your gross rental income.
Formula: NOI = Gross Rental Income - Operating Expenses
Example:
This $10,800 represents the annual income the property generates before debt service and taxes.
Decide which property value to use in your calculation.
Options:
Example: Property listed at $200,000
Important: For the most accurate cap rate comparison, use current market value, not your original purchase price from years ago.
Divide your NOI by the property value and multiply by 100 to get a percentage.
Formula: Cap Rate = (NOI ÷ Property Value) × 100
Example Calculation:
Now that you have your cap rate, put it in context.
Ask These Questions:
Remember: Cap rate is one tool in your investment analysis toolkit. Never make a purchase decision based solely on cap rate—always conduct comprehensive due diligence.
Ready to put this into practice?
Use Landlord Studio to automatically track your rental income and expenses, calculate NOI in real-time, and monitor your property's cap rate throughout the year.
Try Free CalculatorUnderstanding the cap rate formula is one thing—seeing it applied to actual properties is another. Here are three realistic scenarios showing how to calculate cap rate for different property types and investment strategies.
Scenario: You're considering purchasing a single-family home in a growing suburban market to rent out.
Annual Operating Expenses:
Calculation:
What This Means: A 5.4% cap rate is typical for single-family rentals in stable, appreciating markets. While not exceptionally high, this property offers steady cash flow with good potential for appreciation. This cap rate is suitable for investors prioritizing long-term wealth building over immediate cash returns.
Scenario: You're looking to scale your portfolio with a 4-unit apartment building in a secondary market.
Annual Operating Expenses:
Calculation:
What This Means: A 7.7% cap rate represents solid cash flow for a small multifamily property. This is above average for many markets and indicates good income generation relative to the purchase price. Multifamily properties often command higher cap rates than single-family homes due to economies of scale and more predictable income streams.
Scenario: You're evaluating a mixed-use property with retail on the ground floor and apartments above in an urban location.
Annual Operating Expenses:
Calculation:
What This Means: A 6.2% cap rate for a commercial mixed-use property reflects moderate risk and stable returns. Mixed-use properties often have lower cap rates in prime urban locations due to appreciation potential and diversified income streams. The combination of commercial and residential tenants provides income stability while the urban location offers long-term value growth.
The cap rate for rental properties is a crucial tool for making informed investment decisions. However, it's not perfect and there are numerous elements can impact the cap rate that should be considered when setting your cap rate target.
A few of these factors include:
These factors, amongst others, wield significant influence over the cap rate and risk profile of an investment. Investors should consider as many factors as possible before making any investment decisions.
Some investors won't touch anything with a cap rate of less than 8%. Others aim for higher still, looking for double figures hoping to achieve a maximum ROI.
However, it depends on how comfortable you are with risk, your long-term goals, and of course the location that you're investing in. For example, if you wanted to invest in San Francisco you simply won't achieve a 10% cap rate no matter how hard you look.
People who don't want excessive risk but still want to achieve a respectable ROI will often look for a cap rate of between 4-6%. This range offers a reasonably good yield and enough stability for you not to feel nervous about potential cash flow issues.
Cap rates vary significantly by property type, location, and condition. Use this table as a general guide for evaluating whether a cap rate is in line with market standards.
| Property Type | Typical Cap Rate Range | Risk Level | Example Markets |
|---|---|---|---|
| Class A Multifamily | 4% - 6% | Low | NYC, San Francisco, Seattle |
| Class B Multifamily | 6% - 8% | Moderate | Austin, Denver, Portland |
| Class C Multifamily | 8% - 12% | Higher | Secondary/tertiary markets |
| Single-Family Rentals | 5% - 10% | Varies | Market-dependent |
| Commercial Office | 6% - 9% | Moderate | Major metros |
| Retail | 6% - 8% | Moderate-High | Suburban areas |
| Industrial/Warehouse | 5% - 7% | Low-Moderate | Logistics hubs |
Note: Cap rates vary significantly by location, property condition, and market cycle. Always compare to local comparable properties and consider market-specific factors. These ranges represent national averages and should be used as general guidelines, not absolute benchmarks.
Notice the inverse relationship between cap rate and risk level:
Your investment strategy should dictate your target cap rate range: Conservative wealth builders might prefer 4-6%, balanced investors target 6-8%, and value-add specialists seek 8%+ properties they can improve.
Cap rates aren't static—they fluctuate based on market dynamics and economic conditions.
Cap Rates Rise (Properties Become More Affordable) When:
Cap Rates Fall (Properties Become More Expensive) When:
What This Means for Investors: A "good" cap rate in 2020 (interest rates near 0%) might be 4-5%, while a "good" cap rate in 2024 (interest rates at 7%+) might be 6-8%. Always compare to current market conditions, not historical averages.
Related: Free Rental Yield Calculator
It's all very well to crunch the numbers and get your estimated cap rate. But if you don't know what to look for, know what a good cap rate is, and know how to compare properties then calculating your cap rate is a largely pointless exercise.
Generally speaking, a higher cap rate is a riskier investment but is also likely a more profitable one.
It's important to note though that you can't simply set a blanket target cap rate, as cap rates will vary broadly in different locations. As such, you should run a cap rate analysis on several other similar rental properties in the area to give yourself a benchmark.
The target cap rate you look for has to take into account key factors, such as location, demand, and economic stability of the area (for example, how available are jobs?).
.jpeg)
Capitalization rates serve as a powerful tool for real estate investors to assess potential rental property investments. However, as mentioned already, it's not without its flaws and limitations. A few situations where applying the cap rate metric might be limited include:
Cap rate is a powerful tool for evaluating rental properties, but it shouldn't be used in isolation. Understanding how cap rate compares to other investment metrics helps you make more informed decisions and avoid common analysis pitfalls.
| Metric | What It Measures | Best Used For | Key Difference from Cap Rate |
|---|---|---|---|
| Cap Rate | Unlevered return on property | Comparing similar properties | Independent of financing |
| Cash-on-Cash Return | Return on actual cash invested | Evaluating leverage impact | Includes mortgage payments |
| ROI (Return on Investment) | Total return including appreciation | Long-term performance analysis | Includes equity buildup and appreciation |
| Gross Rent Multiplier (GRM) | Price relative to gross income | Quick initial screening | Doesn't account for expenses |
| Internal Rate of Return (IRR) | Time-adjusted total return | Multi-year investment analysis | Factors in timing of cash flows |
This is one of the most common points of confusion for new real estate investors.
Cap Rate: Measures property performance independent of how you financed it
Cash-on-Cash Return: Measures return on your actual out-of-pocket investment
Example Comparison:
Property Details:
Cap Rate: ($10,800 ÷ $200,000) × 100 = 5.4%
Cash-on-Cash Return: ($3,600 ÷ $40,000) × 100 = 9%
Notice how the cash-on-cash return (9%) is significantly higher than the cap rate (5.4%) because leverage amplifies returns. This is why investors use mortgages—to boost their actual returns on invested capital.
When to use each:
While cap rate measures annual operating income, ROI captures your total return including appreciation and equity buildup.
Cap Rate Limitation: Only measures current operating income, ignores future value growth
Total ROI Includes:
Example: A property with a 5% cap rate might deliver 15%+ total annual ROI when you factor in 3-4% appreciation and mortgage paydown.
The Takeaway: In appreciating markets, investors often accept lower cap rates (4-6%) because the total ROI remains attractive. In flat or declining markets, you need higher cap rates (8%+) to compensate for lack of appreciation.
Cap rate is most valuable in these situations:
Professional real estate investors don't rely on a single metric. Instead, they use a combination:
Each metric tells you something different about the investment. Cap rate shows you the property's earning power, cash-on-cash shows you the leverage effect, and total ROI shows you the complete wealth-building picture.
⚠️ Important Reminder: No single metric can tell you if a property is a good investment. Cap rate, cash-on-cash return, and ROI are all tools in your analysis toolkit. Use them together, along with thorough due diligence on the property, neighborhood, and market conditions, to make informed investment decisions.
Whatever your goals are, whether it's simply to generate a little income on the side, to build a nest egg for retirement, or you want to build wealth and achieve financial freedom, the most important aspect is time.
The more time you're managing your rentals the less time you have to scale, travel, or spend time with family and friends.
Modern real estate investors then are always looking for software and automation tools to help them gain control over their portfolios, save time, and improve operational efficiencies.
.png)
Landlord Studio, allows users to easily track income and expenses via their mobile device or desktop. Use time-saving features such as smart scan receipts which allows you to digitize receipts at the point of sale and the software automatically extracts the receipt data and creates the expense for you, and connect your bank feeds to view and reconcile transactions in real-time.
Additional features include property maintenance management, tenant screening, and online rent collection, which enables tenants to automate their rent payments. All income collected through online rent collection is automatically tracked in our income tracker. Automate tenant communications, set reminders for yourself, and more.
Every investor has different circumstances and goals and so you need to adapt your strategy accordingly. A good cap rate for some might not be so good for others. There are numerous determining factors to consider before you make an investment decision. The cap rate is only one metric that you can use to get a quick assessment of a prospective rental property.
The cap rate formula is: (Net Operating Income ÷ Property Value) × 100
This calculation gives you the capitalization rate as a percentage, representing the expected annual return on your real estate investment before financing costs.
Breaking it down:
Example: A property with $12,000 annual NOI and a $200,000 value has a cap rate of 6% ($12,000 ÷ $200,000 × 100 = 6%).
If you don't have an exact property value, you have several options:
Important: For the most accurate cap rate, use current market value rather than outdated assessments or your original purchase price from years ago. Property values change, and an accurate cap rate requires up-to-date valuations.
Cap rate and cash-on-cash return measure different aspects of your investment:
Cap Rate measures the property's return independent of financing:
Cash-on-Cash Return measures your return on actual cash invested:
Example:
Notice the cash-on-cash return (9%) is much higher than the cap rate (5.4%) because leverage amplifies returns. Most investors use both metrics—cap rate to evaluate the property itself, and cash-on-cash to evaluate their personal return on invested capital.
Learn more about calculating cash-on-cash return for rental properties.
Yes, cap rate can be negative, and it's always a red flag for investors.
A negative cap rate occurs when: Operating expenses exceed rental income, resulting in negative Net Operating Income (NOI).
Example of Negative Cap Rate:
What this means: The property is losing money operationally—even before mortgage payments. You're subsidizing the property's operations out of pocket every month.
When negative cap rates might occur:
Is a negative cap rate ever acceptable? Only in specific scenarios:
For traditional buy-and-hold rental investors, a negative cap rate indicates a property that is not viable without significant changes. Avoid these properties unless you have a clear, executable plan to turn the NOI positive.
You should recalculate your property's cap rate annually at minimum, and also whenever significant changes occur.
Recommended Recalculation Schedule:
Annually (at minimum):
Recalculate immediately when:
Why regular recalculation matters:
Your property's cap rate from 5 years ago tells you nothing about its performance today. A property purchased at an 8% cap rate might now be at 6% (due to property appreciation) or 10% (due to market decline). Understanding your current cap rate helps you:
Pro tip: Use property management software like Landlord Studio to automatically track income, expenses, and NOI throughout the year. This makes annual cap rate recalculation as simple as entering your current property value estimate. Try our free cap rate calculator.
A good cap rate for an investment property typically falls within the range of 4% to 10%. However, pinpointing the exact figure hinges on the property's location and the necessary rate of return to deem the investment financially viable. Some areas with higher purchase prices, for example, might achieve lower cap rates in general but cash flow better and achieve better long term capital gains.
There's no single number that can be used as a bad cap rate, just as there aren't any universal numbers for a good cap rate. However, one way to look at it is a bad cap rate would be anything that is lower than the cap rate of a similar property. Again, keep in mind that the property with a lower cap rate might possess long-term potential if enhancements can be made to reduce expenses or boost income.
The cap rate helps real estate investors evaluate whether a property is a good investment by measuring its income potential relative to its price. It's especially useful in commercial real estate for comparing properties beyond surface-level factors like aesthetics or location.
Generally, the capitalization rate can be viewed as a measure of risk. A higher cap rate suggests greater investment risk (but higher profits), while a lower cap rate indicates lower risk (with lower profits). The investor's risk tolerance and profile significantly shape whether a higher or lower cap rate is perceived as favorable.
Return on investment forecasts the potential returns an investment might yield over a defined period. Whereas, the capitalization rate reveals the current return of an investment or its expected yield.
No, though they may seem similar cap rate doesn't directly equate to ROI. Return on investment (ROI) is a versatile metric that assesses the returns relative to the initial investment across various scenarios. Cap rate operates as a percentage figure indicating a property's potential to generate a strong ROI.
In real estate, the cap rate calculation serves as a crucial tool aiding investors in assessing the viability of a deal. It enables them to gauge a property's value and potential returns, making it easier to compare like-for-like properties, and aiding in informed decision-making when pursuing real estate opportunities.
Much like a savvy shopper aiming for the best price, real estate investors are looking for properties that promise the best cash flow. The cap rate formula becomes instrumental in their decision-making, enabling them to discern which property holds the potential to make the most profit.
While the yield percentage of a property is calculated by dividing its annual income by its total cost, the cap rate measures income divided by the property's price or value.
Unlike the cap rate, yield doesn't solely reflect cash flow. Yield, often termed as a rate of return, encompasses broader considerations like leverage and rental property tax deductions, and can help investors get a more comprehensive evaluation of a property's overall cost.
Cap rates are dependent on real estate prices, along with rental rates, both opf which are influenced by broad economic factors. Consequently, distinct regions exhibit differing cap rates determined by the local economy, property values, and average rental rates. As such, when comparing rental property cap rates it's important to only compare similar properties in comparable neighborhoods. There's no point comparing a New York City property to one in small-town Ohio.
The cap rate serves as a quick way to assess a property's performance. It however, only looks at current data and doesn't take into account local investment in the area, potential growth of the housing market, or renovations the investor makes. By only looking at cap rate then you could potentially miss hidden gems.
The capitalization rate, derived from dividing the net operating income by the purchase price, defines the stability of real estate assets. However, real estate values aren't always constant; they fluctuate based on factors like vacancy rates, neighborhood dynamics, and market conditions. When a property's value rises, dividing the annual net income by the purchase price results in a decreased percentage, leading to a lower cap rate. This phenomenon is termed cap rate compression.
Debate exists among real estate investors regarding whether cap rate compression indicates higher or lower risk. On one side, it signifies the property's ascension as an appreciating asset class. Conversely, it can pose challenges for new investors aiming to enter the market, potentially necessitating cash purchases if securing favorable lending becomes challenging amidst cap rate compression.
Landlord Studio is an easy to use property management and accounting software designed for landlords.
Find and screen tenants, collect rent online, track income and expenses, run reports, and more - all for free.
Learn the key metrics, scalable systems, and tax strategies that turn side investors into serious portfolio builders.
Hosted by: Matt Hardy, Head of Marketing at Landlord Studio
Guest: Micah White, Real Estate With Micah
Duration: 30 minutes + Live Q&A, Live Webinar
When: 17th February 1:00pm (Central)
From finding tenants to filing taxes. Reduce vacancies and maximize your portfolio ROI with software designed for you.
Get started for free
.jpg)
.webp)
![2026 Rental Property Analysis Spreadsheet [Free Template]](https://cdn.prod.website-files.com/637ac7502ecc7e25ee8a2510/6501b7bdaaf9cb5487f7ddae_property%20analysis%20(1).webp)