Cap rate formula
Effective income = Gross rent × (1 − Vacancy)
NOI = Effective income − Operating expenses
Cap rate = NOI ÷ Property value × 100
NOI = Effective income − Operating expenses
Cap rate = NOI ÷ Property value × 100
Example: A $400,000 property rents for $3,000 a month ($36,000 a year). With 5% vacancy the effective income is $34,200. Subtracting $12,000 of operating expenses gives an NOI of $22,200, so the cap rate is 5.55%. At a 6% target cap rate the property would be worth $370,000.
What to include in operating expenses
- Property taxes and insurance
- Repairs and maintenance (often 5–10% of rent)
- Property management (typically 8–10% of collected rent)
- HOA fees, utilities paid by the owner, landscaping, pest control
- Capital reserves for roof, HVAC and appliances
Measure the return on your actual cash with the cash-on-cash return calculator.
Frequently asked questions
What is a good cap rate?
It depends on the market and risk. In 2026 many U.S. residential rentals trade between about 5% and 8%. Higher cap rates mean more income per dollar but often come with more risk, older buildings or weaker locations.
How do I calculate cap rate?
Cap rate = net operating income ÷ property value. NOI is rent after vacancy minus operating expenses such as property tax, insurance, repairs, management and HOA fees — but not mortgage payments or depreciation.
Why aren’t mortgage payments included?
Cap rate measures the property itself, as if bought with cash. Financing is personal to the buyer. To include the loan, use cash-on-cash return.
Can I use cap rate to value a property?
Yes: value = NOI ÷ market cap rate. If similar buildings sell at a 6% cap rate and yours produces $22,200 of NOI, it is worth roughly $370,000.