How do you calculate cap rate?

Divide the property's annual net operating income by its purchase price or current value. NOI is rent and other income, less vacancy and every operating expense (taxes, insurance, maintenance, management, and dues) but before any mortgage payment. A property that nets $15,000 a year and costs $250,000 has a 6.0% cap rate.

What is a good cap rate for a rental property?

There is no single number, because cap rate prices risk and growth. Well-located apartment buildings in large coastal metros often trade near 5%, while single-family rentals in smaller Midwest and Southern markets can reach 8 to 10%. A lower cap rate usually means a safer, faster-appreciating asset; a higher one pays more income now in exchange for more risk or slower growth.

What is the difference between cap rate and cash-on-cash return?

Cap rate ignores financing: it compares income to the full price, as if you paid cash. Cash-on-cash compares the cash flow left after the mortgage to the cash you actually put in, including the down payment, closing costs, and initial repairs. Leverage can push cash-on-cash well above or below the cap rate, depending on whether the loan costs more or less than the property earns.

Does cap rate include the mortgage?

No. Cap rate is deliberately financing-neutral so that two buyers with different loans can value the same building the same way. Your mortgage shows up in cash flow, cash-on-cash return, and the debt service coverage ratio instead.

Is the 1% rule still realistic?

In most US markets, not at today's prices. The rule, monthly rent of at least 1% of the price, was a quick screen when homes were cheaper relative to rents. Many good rentals now rent for 0.6 to 0.8% of price and still cash-flow with enough down payment. Treat it as a filter for further analysis, never as a verdict.

Cap Rate & Rental ROI Calculator

K-08

Read a rental every way investors do: net operating income, cap rate, cash-on-cash return, year-one total return, GRM, and the 1% rule, from the same inputs.

Reviewed October 2026 · Free, no sign-up · Seven return measures · Runs in your browser

Property inputs

Purchase price

Closing costs

Repairs before renting

Monthly rent

Other income / month

Laundry, parking, storage, pet fees.

Vacancy

Property taxes / year

Insurance / year

Maintenance & CapEx

Share of rent set aside for repairs and replacements.

Property management

HOA & other / month

Dues, owner-paid utilities, lawn care.

Down payment

Set 100% for an all-cash purchase. Cap rate ignores financing; the other returns don't.

Interest rate

Loan term

15 yr20 yr30 yr

Appreciation / year

This rental earns a 6.3%N2 cap rate, $15,658N1 a year before any mortgage, and returns 1.2%N4 cash on cash after it.

Plan K-0830-year fixed at 6.875% with 25% down. Estimates, not investment advice.

Net operating incomeN1: $1,305/mo; 38% of income goes to costs
Cash investedN3: $72,500; down, closing, repairs
Cash flowN4: $73/mo; after $1,232 P&I
Year-one total returnN5: 14.2%; with paydown and appreciation

Where the rent goes

$2,100 a month: each cost, and what is left for you

Mortgage, P&I: $1,232; 59%
Property taxes: $229; 11%
Insurance: $125; 6%
Vacancy: $105; 5%
Maintenance & CapEx: $168; 8%
Management: $168; 8%
Your cash flow: $73; 3%

Every return measure, and the price for each cap rate

The same deal read seven ways, then priced backward from the NOI

Measure	Value	Reading
Cap rate	6.3%	6% or more: typical of rentals that cash-flow
Cash-on-cash	1.2%	Under 8%: thin for the risk
Year-one total return	14.2%	Cash flow, loan paydown, and appreciation
Gross rent multiplier	9.9	Price ÷ a year's rent; lower is cheaper
1% rule	0.84%	Misses: rent is under 1% of price
Expense ratio	38%	Operating costs ÷ gross income; 35–50% is typical
DSCR	1.06	Under 1.20: tight for a lender

Target cap rate	Price to pay
5%	$313,160
6%	$260,967
7%	$223,686
8%	$195,725
9%	$173,978
10%	$156,580

Green prices are at or above your $250,000: you already pay less than that cap rate implies.

Estimates for education only, not investment advice. Cap rate uses the purchase price alone; closing costs and repairs count in cash invested. Use real quotes for taxes and insurance before you offer.

What cap rate measures

The capitalization rate is the yield a property produces on its price before any financing: annual net operating income divided by what you pay. It answers a narrow, useful question. If you bought this building for cash, what percentage of the price would come back each year as income? That makes it the standard way to compare properties of different sizes, and the standard way appraisers and brokers value income property.

Everything rests on NOI being honest. It is rent and other income, less a vacancy allowance, less every cost of running the property: taxes, insurance, maintenance and capital reserves, management, and dues. It excludes the mortgage, income taxes, and depreciation. Sellers' pro formas often understate maintenance and leave out management; the calculator charges both as a share of rent so a self-managed deal still accounts for your time.

Cap rate, cash-on-cash, and total return

Cap rate describes the property. Cash-on-cash return describes your deal: the cash flow after the mortgage, divided by the cash you put in. Total return adds the two quieter ways a rental pays you, principal paid down by the tenant's rent and the home's appreciation, over the same cash. A property can have a modest cap rate, thin cash flow, and still a respectable total return, or the reverse. Reading all three keeps one flattering number from deciding a purchase.

Depreciation adds a fourth layer, a tax deduction that shelters part of the cash flow; the rental depreciation calculator estimates it. If you plan to finance with a DSCR loan, the DSCR calculator tests the same deal against lender rules.

How to use this calculator

Enter the price and the cash costs to start. Closing costs and make-ready repairs count in cash invested, not in the cap rate.
Enter rent, other income, and vacancy. Use a rent supported by comparable leases, and five to eight percent vacancy for a single-family home.
Enter operating costs. Use the actual tax bill and an insurance quote. Maintenance at 8 to 10% of rent and management at 8 to 10% are common for single-family rentals.
Set the financing. Slide the down payment to 100% to see the all-cash returns; any lower and the mortgage enters cash flow.
Read the verdict and the measures table. Each measure carries a short reading against the usual benchmark.
Price it backward. The right-hand table gives the price that would produce each target cap rate from your NOI: a disciplined way to set an offer.

Formulas & methodology

N1Net operating income

NOI = (Rent + Other) − Vacancy − Taxes − Insurance − Maintenance − Management − HOA

Annual NOI = monthly NOI × 12

N2Cap rate and gross rent multiplier

Cap rate = Annual NOI ÷ Price

GRM = Price ÷ (Rent × 12)

N3Cash invested and the mortgage

Cash invested = Down payment + Closing costs + Repairs

P&I = L × r ÷ (1 − (1 + r)^−n)

N4Cash flow and cash-on-cash

Cash flow = NOI − P&I

Cash-on-cash = Cash flow × 12 ÷ Cash invested

N5Year-one total return

Total return = (Annual cash flow + Principal paid in year one + Price × appreciation %) ÷ Cash invested

Vacancy applies to rent and other income; maintenance and management apply to scheduled rent. Year-one principal paydown comes from the loan's amortization schedule. Appreciation is unrealized until you sell, and selling costs would claim part of it, so the total return is an upper estimate for year one.

Worked example

A $250,000 rental leases for $2,100 a month. After 5% vacancy, $2,750 of taxes, $1,500 of insurance, and 8% each for maintenance and management, net operating income is $15,658 a year: a 6.3% cap rate and a gross rent multiplier of 9.9.

Financed with 25% down at 6.875%, the mortgage takes $1,232 a month and leaves $73 of cash flow on $72,500 invested,a 1.2% cash-on-cash return. Add $1,951 of year-one principal paydown and $7,500 of 3% appreciation and the year-one total return is 14.2%.

Measure	Financed	All cash
Cash invested	$72,500	$260,000
Annual cash flow	$877	$15,658
Cap rate	6.3%	6.3%
Cash-on-cash return	1.2%	6.0%
Year-one total return	14.2%	8.9%

The comparison shows leverage at work. The cap rate is identical either way because it ignores the loan. Cash-on-cash falls with the loan, because the mortgage rate is above what the property yields: borrowing at more than the cap rate is negative leverage, and it shows up first in cash flow. At a 6% cap rate, this NOI would justify a price of $260,967.

What is a good cap rate?

A cap rate is a price, not a grade. Buyers accept a low cap rate when they expect income to grow and risk to stay low, in strong job markets, newer buildings, and scarce locations. They demand a high one when the income is less certain: older properties, weaker tenant pools, or slow-growing towns. Compare a property to recent sales of similar buildings nearby, not to a national average.

Below about 5%: typical of prime apartments and expensive coastal single-family homes. The return relies on appreciation and rent growth.
Roughly 5 to 7%: common for stable rentals in growing metros. Cash flow depends heavily on the financing.
Above about 8%: common in smaller and slower markets. Strong income, but check the vacancy, repair, and turnover assumptions harder.

The useful test is the spread over your borrowing cost. When the cap rate sits below the mortgage rate, every borrowed dollar dilutes your cash return, as the worked example shows.

Rules of thumb, and their limits

The 1% rule: monthly rent at least 1% of the price. A fast screen, but few US markets meet it today; use it to sort listings, not to buy.
The 50% rule: operating expenses run about half of rent over time. The expense ratio in the measures table shows how your assumptions compare.
Gross rent multiplier: price divided by a year's rent. Quick to compare similar homes on the same street, blind to taxes and insurance, which vary widely from state to state.

Cap rate FAQ

How do you calculate cap rate?: Divide the property's annual net operating income by its purchase price or current value. NOI is rent and other income, less vacancy and every operating expense (taxes, insurance, maintenance, management, and dues) but before any mortgage payment. A property that nets $15,000 a year and costs $250,000 has a 6.0% cap rate.
What is a good cap rate for a rental property?: There is no single number, because cap rate prices risk and growth. Well-located apartment buildings in large coastal metros often trade near 5%, while single-family rentals in smaller Midwest and Southern markets can reach 8 to 10%. A lower cap rate usually means a safer, faster-appreciating asset; a higher one pays more income now in exchange for more risk or slower growth.
What is the difference between cap rate and cash-on-cash return?: Cap rate ignores financing: it compares income to the full price, as if you paid cash. Cash-on-cash compares the cash flow left after the mortgage to the cash you actually put in, including the down payment, closing costs, and initial repairs. Leverage can push cash-on-cash well above or below the cap rate, depending on whether the loan costs more or less than the property earns.
Does cap rate include the mortgage?: No. Cap rate is deliberately financing-neutral so that two buyers with different loans can value the same building the same way. Your mortgage shows up in cash flow, cash-on-cash return, and the debt service coverage ratio instead.
Is the 1% rule still realistic?: In most US markets, not at today's prices. The rule, monthly rent of at least 1% of the price, was a quick screen when homes were cheaper relative to rents. Many good rentals now rent for 0.6 to 0.8% of price and still cash-flow with enough down payment. Treat it as a filter for further analysis, never as a verdict.