Cap Rate Calculator Guide: What Is a Good Cap Rate? (2026)
Quick Answer
Cap rate (capitalization rate) = Net Operating Income (NOI) ÷ Property Value. A 5–10% cap rate is generally considered good for residential rental properties, while commercial properties vary by asset class. Higher cap rates indicate higher return but also higher risk. Cap rate is the inverse of the price-to-income multiple used to value the property.
The Cap Rate Formula Explained
Capitalization rate — cap rate for short — is the most widely used metric in commercial and residential real estate investment. It tells you what income yield a property produces relative to its price, assuming you paid all cash.
The formula is simple:
Cap Rate = Net Operating Income (NOI) ÷ Property Value
NOI is where most of the work happens. Here's how to build it:
- Gross Scheduled Rent: Total rent if the property were 100% occupied all year.
- Minus Vacancy & Credit Loss: Typically 5–10% for well-located properties. CBRE's Cap Rate Survey uses local market vacancy data to standardize this assumption.
- Equals Effective Gross Income (EGI)
- Minus Operating Expenses: Property taxes, insurance, property management fees (typically 8–10% of collected rents), maintenance, repairs, utilities paid by landlord, and reserves for capital expenditures.
- Equals Net Operating Income (NOI)
Critically, NOI does notinclude mortgage payments, depreciation, or income taxes. Cap rate is a pre-financing, pre-tax metric. This makes it useful for comparing properties regardless of how they're financed.
Worked Example
You're evaluating a 4-unit apartment building listed at $800,000. Here's the NOI calculation:
| Line Item | Annual Amount |
|---|---|
| Gross Scheduled Rent (4 units × $1,800/mo × 12) | $86,400 |
| Less: Vacancy (7%) | (−$6,048) |
| Effective Gross Income | $80,352 |
| Less: Property Taxes | (−$9,000) |
| Less: Insurance | (−$3,200) |
| Less: Property Management (9%) | (−$7,232) |
| Less: Maintenance & Repairs | (−$4,800) |
| Less: CapEx Reserves | (−$3,600) |
| Net Operating Income (NOI) | $52,520 |
Cap Rate = $52,520 ÷ $800,000 = 6.57%
You can also rearrange the formula to solve for property value: Value = NOI ÷ Cap Rate. If similar properties sell at a 6% cap rate and your building produces $52,520 NOI, the implied value is $52,520 ÷ 0.06 = $875,333. That's the core logic of income-based property valuation. Use our cap rate calculator to run these numbers in seconds.
What Is a Good Cap Rate?
There's no universal answer — cap rates vary by property type, location, building quality, and market cycle. But here are the ranges that practitioners use as benchmarks, based on CBRE's Cap Rate Survey and NAR commercial property data:
| Property Type | Typical Cap Rate Range | Notes |
|---|---|---|
| Single-Family Rental | 4–8% | Highly location-dependent; gateway markets trend toward the low end |
| Multifamily (Apartment) | 4–7% | Class A urban core closer to 4%; Class C suburban closer to 7% |
| Office | 6–9% | Higher cap rates reflect post-COVID uncertainty; suburban office elevated |
| Retail | 5–8% | Net-lease retail (NNN) trades tighter; strip malls trade wider |
| Industrial / Warehouse | 4–7% | Strong demand from e-commerce; cap rates compressed significantly since 2020 |
| Self-Storage | 5–9% | Higher in rural/tertiary markets; Class A urban storage tighter |
According to the NCREIF Property Index, the overall cap rate for institutional-grade commercial property in the U.S. averaged 4.8% in 2025, up from a historic low of 4.1% in 2021 as interest rates rose. Industrial was the tightest at 4.3%; office was the widest at 7.2%.
For residential investors, a 6–8% cap rate is a common target. Below 5% is often difficult to cash-flow with any leverage. Above 9% warrants scrutiny — the market is pricing in risk (deferred maintenance, high vacancy, weak rent growth) that may be warranted.
Cap Rates by Market Tier
Location is the single biggest driver of cap rate. The same property type will trade at dramatically different cap rates depending on whether it's in a gateway city, a secondary market, or a tertiary market. JLL Capital Markets data consistently shows this pattern:
| Market Tier | Examples | Typical Cap Rate Range | Risk/Return Profile |
|---|---|---|---|
| Class A — Gateway Cities | New York, San Francisco, Los Angeles, Boston, Seattle | 3–5% | Lower current yield; strong rent growth, deep liquidity, institutional buyers compete for assets |
| Class B — Secondary Markets | Austin, Denver, Nashville, Charlotte, Phoenix, Raleigh | 5–7% | Balanced risk/return; growing populations, diversifying economies, improving liquidity |
| Class C — Tertiary Markets | Smaller metros, rural markets, economically distressed areas | 7–10%+ | Higher current yield; limited liquidity, volatile rents, harder to exit, fewer institutional buyers |
This risk/return tradeoff is the fundamental tension in real estate investing. A 4% cap rate in Manhattan isn't “bad” — investors accept lower current yield because they're buying into one of the deepest, most liquid real estate markets in the world with predictable long-term rent growth. A 9% cap rate in a shrinking Rust Belt city reflects real risk: population decline, vacancy, and the possibility you can't find a buyer when you want to exit.
CoStar data shows that secondary markets like Austin and Nashville saw cap rate compression of 80–120 basis points from 2019 to 2022 as institutional capital flooded Sun Belt markets. As rates rose post-2022, those same markets saw 50–100 bps of cap rate expansion — meaning prices fell.
Cap Rate vs Other Return Metrics
Cap rate is useful, but it's one tool among several. Here's how it compares to the other metrics real estate investors use:
| Metric | What It Measures | Includes Financing? | Best Used For |
|---|---|---|---|
| Cap Rate | Income yield on full property value | No | Comparing properties; quick valuation check; market pricing benchmarks |
| Cash-on-Cash Return | Annual cash flow as % of cash invested (down payment) | Yes | Evaluating leveraged returns; comparing to other yield investments |
| IRR (Internal Rate of Return) | Total annualized return including appreciation and sale proceeds | Can include either | Full hold-period analysis; comparing against other asset classes |
| GRM (Gross Rent Multiplier) | Price ÷ Gross Annual Rent (no expense adjustment) | No | Quick back-of-envelope screening; not reliable for final decisions |
Cap rate is best for initial screening and market comparison. Cash-on-cash is better for evaluating your actual levered return given today's mortgage rates. IRR is the right tool for modeling a full investment lifecycle, including assumptions about rent growth, expense inflation, and exit price.
The key insight: cap rate ignores financing, which means it doesn't tell you whether a deal is a good investment at current debt costs. A property with a 5.5% cap rate financed at a 7% mortgage rate has negative leverage — you're borrowing money at a higher rate than the property earns. Your cash-on-cash return will be below the cap rate, and you're dependent on appreciation to generate real returns.
How Cap Rates and Interest Rates Interact
The relationship between cap rates and interest rates is one of the most important dynamics in commercial real estate. It's captured by a concept called the cap rate spread— the difference between the prevailing cap rate and the yield on the 10-year U.S. Treasury.
Historically, cap rates have traded at a spread of 150–250 basis points above the 10-year Treasury. Investors demand this premium to compensate for the illiquidity, management burden, and risk of real estate relative to a risk-free government bond.
When the 10-year Treasury was near 1% in 2021, a 4% cap rate still represented a healthy 300 bps spread — real estate looked attractive. When the 10-year climbed above 4.5% in 2023, that same 4% cap rate suddenly represented negative spread. Investors could earn more in a Treasury note than in real estate, with none of the hassle. The result: buyers demanded higher cap rates (lower prices) to restore the spread.
According to JLL Capital Markets research, office cap rates expanded by roughly 120 bps and multifamily by 80 bps between mid-2022 and end-2023. On a $10M property, an 80 bps cap rate expansion translates to approximately $1.6M in lost value (assuming stable NOI).
The formula works in reverse too. When rates fall, required cap rates compress, and property values rise even if NOI stays flat. This is why institutional real estate performed so well in the 2010s — a decade of falling interest rates mechanically pushed up property values across all asset classes.
For individual investors, the practical implication is this: buy when cap rate spreads are wide (rates high, real estate cheap relative to Treasuries), and be cautious when spreads are thin. The NCREIF Property Index data going back to 1978 shows that the best real estate vintages — measured by 5-year forward returns — have come when cap rates traded at elevated spreads to Treasuries.
Calculate cap rate for any property
Use our free Cap Rate Calculator →Also try our Rental Property Calculator for full cash-on-cash and NOI analysis
Frequently Asked Questions
What is a good cap rate for rental property?
A cap rate of 5–10% is generally considered good for residential rental properties. Single-family rentals typically fall in the 4–8% range, while multifamily sits around 4–7%. Higher cap rates indicate higher potential return but usually come with more risk — older buildings, weaker markets, or higher vacancy rates. According to CBRE's Cap Rate Survey, Class A multifamily in gateway markets averaged 4.3% in 2025.
What is the cap rate formula?
Cap Rate = Net Operating Income (NOI) ÷ Property Value. NOI equals gross rental income minus vacancy allowance minus operating expenses (property taxes, insurance, maintenance, property management, utilities). Mortgage payments and depreciation are notincluded in NOI — cap rate is a pre-financing metric.
Is a higher or lower cap rate better?
It depends on your goals. A higher cap rate means more income relative to price — higher return potential, but typically higher risk (weaker market, older asset, more management intensity). A lower cap rate signals a premium asset in a strong market with stable tenants. Class A office in Manhattan might cap at 4%; a self-storage facility in a rural tertiary market might cap at 9%. Neither is inherently better; it depends on your risk tolerance and investment strategy.
What is the difference between cap rate and cash-on-cash return?
Cap rate ignores financing entirely — it measures the property's income yield on its full value. Cash-on-cash return measures your annual pre-tax cash flow as a percentage of actual cash invested (your down payment plus closing costs). If you finance a property, your cash-on-cash return will be higher than the cap rate when borrowing costs are below the cap rate (positive leverage) and lower when borrowing costs exceed the cap rate (negative leverage).
How do rising interest rates affect cap rates?
When interest rates rise, investors demand higher cap rates to maintain an adequate spread over the risk-free rate. If NOI stays the same but the required cap rate rises — say from 5% to 6% — property values must fall to deliver that higher yield. This is why rising rates in 2022–2023 caused commercial real estate valuations to decline 20–30% in many markets, according to JLL Capital Markets data.
Can you use cap rate to compare properties in different markets?
Yes, and it's one of cap rate's most useful applications. A single-family rental in Austin at a 6% cap rate and one in Detroit at a 9% cap rate are not equivalent investments — the Austin property commands a premium because of stronger rent growth prospects and lower vacancy risk. The cap rate difference reflects market risk. Use cap rate alongside rent growth forecasts, vacancy data (CoStar tracks this by submarket), and population trends to make cross-market comparisons meaningful.