Question 1

What is cap rate and how is it calculated?

Accepted Answer

Cap rate (capitalization rate) = Net Operating Income (NOI) ÷ Property Value × 100. NOI = Effective Gross Income (gross rent minus vacancy) minus all operating expenses (taxes, insurance, maintenance, management fees, utilities). Mortgage payments are NOT included in operating expenses for cap rate calculation. A $500,000 property generating $35,000 in NOI has a 7% cap rate ($35,000 ÷ $500,000 = 0.07 = 7%).

Question 2

What is a good cap rate for a rental property?

Accepted Answer

A "good" cap rate depends heavily on market and asset type. In high-demand urban markets (NYC, SF, LA), cap rates of 3-5% are typical for Class A multifamily. In secondary markets (Dallas, Atlanta, Phoenix), 5.5-7% is common. In tertiary and rural markets, 8-12%+ is possible. Higher cap rates mean higher current yield but often higher risk or lower appreciation potential. Lower cap rates indicate premium assets in high-demand markets with strong appreciation prospects.

Question 3

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

Accepted Answer

Cap rate measures the unlevered return on a property (ignores financing) and is used for property valuation and comparison. Cash-on-cash return measures the actual return on your invested equity (down payment), accounting for mortgage payments. A property with a 6% cap rate might have a 4% cash-on-cash return if you finance 75% of the purchase. Cash-on-cash is more relevant for investors who use leverage; cap rate is more relevant for comparing properties regardless of financing.

Question 4

What expenses are excluded from NOI in cap rate calculation?

Accepted Answer

NOI for cap rate purposes excludes: mortgage principal and interest payments, income taxes, depreciation, capital expenditures (CapEx), and loan fees. It includes: property taxes, insurance, property management fees (typically 8-12% of gross rent), maintenance and repairs, utilities paid by landlord, HOA fees, landscaping, and vacancy/credit loss allowance. A common mistake is excluding management fees -- even self-managed properties should include a management fee to get an accurate cap rate.

Question 5

How do I use cap rate to determine property value?

Accepted Answer

Property Value = NOI ÷ Cap Rate. If a property generates $40,000 in NOI and market cap rates for similar properties are 6.5%, the implied value is $40,000 ÷ 0.065 = $615,385. This is how commercial real estate appraisers value income-producing properties using the Income Approach. To increase property value, you can either increase NOI (raise rents, reduce vacancy, cut expenses) or benefit from cap rate compression (market-driven demand that lowers prevailing cap rates).

Market	Asset Type	Cap Rate Range
Manhattan / San Francisco	Class A Multifamily	3.0–4.5%
Los Angeles / Seattle / Boston	Class A Multifamily	4.0–5.5%
Dallas / Atlanta / Phoenix	Class B Multifamily	5.5–7.0%
Midwest Secondary Markets	Class B/C Multifamily	6.5–8.5%
Rural / Tertiary Markets	Any Class	8.0–12%+
National Average (Industrial)	Industrial / Warehouse	5.5–7.0%
National Average (Retail Strip)	Neighborhood Retail	6.0–8.0%
National Average (Office)	Suburban Office	6.5–9.0%

Cap Rate Calculator

Rental Income

Operating Expenses (Annual)

Property Details

Financing (for Cash-on-Cash Return)

Cap Rate Analysis

Market Cap Rate Benchmarks

Frequently Asked Questions

Related Calculators