What is a good cap rate for real estate?

There is no single "good" cap rate — it depends on the market, property type, and your risk appetite. In primary markets (New York, Los Angeles, London), cap rates of 3–5% are common because investors pay for appreciation potential. In secondary and tertiary markets, investors typically look for 6–9%+ cap rates to compensate for higher risk and lower liquidity. As a general rule, a cap rate above 5% in any market is worth examining further; below 3% usually means you are buying for growth, not income.

What is the difference between cap rate and rental yield?

They measure similar things but use different expense treatments. Gross rental yield is simply (annual rent / property value) × 100 — no expenses deducted. Cap rate uses NOI (gross income minus all operating expenses) as the numerator, giving a more accurate picture of income after costs. Cap rate is also more commonly used in commercial real estate, while rental yield is more common in residential property discussions. A property with a 7% gross yield might have a 5% cap rate after expenses.

How do I calculate cap rate?

Calculate your annual Net Operating Income (NOI) by subtracting all operating expenses from annual gross rental income. Then divide NOI by the property value and multiply by 100. For example: $28,000 NOI ÷ $350,000 property value × 100 = 8.0% cap rate. Operating expenses include property taxes, insurance, management fees, and maintenance — but not mortgage payments.

What cap rate should I look for when investing?

Your minimum acceptable cap rate depends on your alternative investment options (opportunity cost), local market conditions, and growth expectations. A common rule of thumb: use cap rate minus the risk-free rate (e.g. 10-year Treasury yield) as your "risk premium." If Treasuries yield 4.5% and you require a 2% risk premium for real estate, you should target a 6.5%+ cap rate. Markets with strong rent growth expectations can justify lower cap rates.

How does cap rate vary by city?

Cap rates are heavily influenced by local supply-demand dynamics and investor demand. Gateway cities like New York, San Francisco, and London typically see multifamily cap rates of 3–5%. Mid-tier cities (Atlanta, Phoenix, Dallas) often trade at 5–7%. Tertiary markets and rural areas can see 8–12%+ cap rates, reflecting higher vacancy risk and lower liquidity. Commercial property types (office, retail, industrial) each have their own cap rate norms within each market.

Does cap rate include mortgage payments?

No — cap rate is calculated before financing costs (mortgage principal and interest). This makes cap rate a property-level metric, not a return-on-equity metric. The advantage is that cap rate lets you compare properties fairly regardless of how they are financed. To evaluate your actual return on invested equity after a mortgage, use a cash-on-cash return calculation instead.

What operating expenses should I include in the cap rate calculation?

Include property taxes, insurance, property management fees (typically 8–12% of gross rents), routine maintenance and repairs, landscaping, pest control, utilities paid by the landlord, and a vacancy reserve (typically 5–10% of gross rents). Do not include mortgage principal or interest, income taxes, depreciation, or capital expenditures in the cap rate operating expenses — these are separate from NOI.

Cap Rate Calculator

The Cap Rate Calculator computes the capitalization rate — the single most widely used metric for evaluating commercial and residential investment property. Cap rate measures a property's income potential as a percentage of its value, independent of financing. A higher cap rate signals higher income relative to price (and typically higher risk); a lower cap rate suggests a premium-priced, lower-risk asset. Use this alongside the Rental Yield Calculator to compare investment opportunities on a like-for-like basis.

Annual Gross Rental Income

Total rent collected before any expenses

Annual Operating Expenses

Taxes, insurance, management, maintenance — not mortgage

Property Value

Cap Rate

8.00%

Net Operating Income (NOI)

$28,000.00

Annual Gross Income

$36,000.00

Expense Ratio

22.2%

How to use this calculator

1
Enter annual gross rental income
The total rent you collect before deducting any expenses. For a multi-unit property, sum all unit rents.
2
Enter annual operating expenses
Include property management fees, insurance, property taxes, maintenance and repairs, and any other recurring costs. Do not include mortgage payments or depreciation — cap rate is a pre-financing metric.
3
Enter the property value
Use the current market value or purchase price. Cap rate changes over time as property values move — recalculate periodically to track investment performance.
4
Read your cap rate and NOI
The calculator shows cap rate, net operating income (NOI), gross income, and the expense ratio. A cap rate at or above 5% is generally considered acceptable; below 3% suggests the property is priced for appreciation rather than income.

Formula

NOI (Net Operating Income) = Annual Gross Income − Annual Operating Expenses

Cap Rate = (NOI ÷ Property Value) × 100

Expense Ratio = (Annual Operating Expenses ÷ Annual Gross Income) × 100

NOI is the annual income after operating expenses but before financing costs (mortgage interest, principal repayments) and income taxes. Cap rate expresses NOI as a percentage of the property's value, making it comparable across properties of different sizes and markets. Example: a property worth $350,000 with $36,000 gross income and $8,000 operating expenses has an NOI of $28,000 and a cap rate of 28,000 / 350,000 × 100 = 8.0%.

Worked Example

Annual Gross Rental Income: $36,000 Annual Operating Expenses: $8,000 Property Value: $350,000 NOI = $36,000 − $8,000 = $28,000 Cap Rate = ($28,000 ÷ $350,000) × 100 = 8.0% Expense Ratio = ($8,000 ÷ $36,000) × 100 = 22.2% An 8.0% cap rate is well above the 5% minimum threshold most investors use in secondary markets. In a primary market like New York or San Francisco, the same cap rate would be considered exceptional — properties there often trade at 3–4% cap rates due to appreciation expectations.

Frequently Asked Questions

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