Cap rate, calculated and explained
Cap rate is a property's annual net operating income divided by its purchase price — the yield the building throws off before any financing.
Formula
cap rate = annual NOI ÷ purchase price
Worked on a $285,000 rental
$22,116 ÷ $285,000 = 7.8%
7.8%
Cap rate deliberately ignores your mortgage. Two buyers paying the same price for the same building get the same cap rate even if one pays cash and the other borrows 80% — because the number describes the property, not the deal you financed on top of it.
That is exactly why it travels. A 7% cap in Cleveland and a 7% cap in Austin are comparable in a way that cash-on-cash return never is, which is why it is the first number a commercial broker quotes and the first one an appraiser checks.
The trap is that NOI is not rent. It is rent after vacancy and after every operating expense — taxes, insurance, management, maintenance, reserves. A listing that advertises a cap rate almost always computed it on a thinner expense load than you will actually carry.
What counts as good
< 4%
You are buying appreciation, not income. Common in expensive coastal metros; it rarely cash-flows with a loan on it.
5–8%
The ordinary range for residential rentals in most U.S. markets. Enough yield to cover debt service at typical rates.
> 10%
Check the expenses before celebrating. Unusually high caps usually price in a risk you have not found yet — the neighborhood, the condition, or the tenant.
What it won't tell you
Cap rate says nothing about whether you can afford the property. A building can post a healthy cap rate and still lose money every month once the mortgage is applied — that is what DSCR and cash flow are for.
Calculate cap rate on a real property
Cap rate is computed alongside every other metric, from the same inputs. Change any assumption and all of them update at once.
Analyzing this as
Import a deal
Use a property that's for sale. A “for rent” listing has a monthly rent but no purchase price, so there's nothing to buy and nothing to work out.
A link fills in the address. Copied text fills in the price and size too, plus the Rent Zestimate if the page shows one. Whatever it misses, you can type — it's never more than a number or two.
Nothing is scraped: the page is read in your browser, and only the address is ever sent to us.
Fits your rental criteria
- Max workable price
- ~$316,000
- You’re asking
- $285,000
You’re about $31,000 below your maximum workable price.
Tightest constraint: DSCR — 1.36x against a minimum of 1.20x.
Why
- Monthly cash flow $498/mo vs min $0/mo
- DSCR 1.36x vs min 1.20x
- Cash-on-cash return 7.8% vs min 4.0%
- Break-even occupancy 77.8% vs max 90.0%
Biggest uncertainty: the rent
- At $2,900/moPASS
- At $2,611/moFAIL
- Minimum rent required$2,612/mo
Every other input here is a price or a rate you can look up. The rent is usually an estimate, and it is the input the answer moves most on — check it against two real rentals nearby before you act on any of this.
Second uncertainty: the property tax
- At $225/moPASS
- At $452/moFAIL
- Most tax this supports$447/mo
That figure is the national median, and no property is in the national median — pick a state above, then check the listing's own tax line. The ceiling is 1.88% of the price a year. 2 of 51 states tax above that, starting with Illinois — in any of them this fails on tax alone.
Max workable price is based on your assumptions and screening criteria. It is not an appraisal, and not an estimate of market value. Assumes 25% down at 6.67% over 30 years, with tax and insurance at national average rates. Change any of it under “Adjust the assumptions”.
If the rent comes in low
It works at your rent but not at the bottom of the range, so the answer depends on where the property actually lands.
It stops working below $2,612/mo — that's your margin on the rent.
| Scenario | Rent | Cash flow | Verdict |
|---|---|---|---|
| Conservative | $2,610 | $273/mo | FAIL |
| Base(yours) | $2,900 | $498/mo | PASS |
| Optimistic | $3,190 | $720/mo | PASS |
The range is your rent plus or minus 10%, which is roughly how far a rent estimate is routinely wrong. Import a listing with market data configured and this becomes the range the actual comps support. No confidence percentage is shown, because nothing here has a validated error rate to base one on.
Clears every bar: $498/mo of cash flow on $76,950 invested.
That's a 7.8% cash-on-cash return, with the income covering the loan 1.36x over. Verify the tax bill and get a real insurance quote before you offer.
Property
$285,000 purchase · 25% down · 6.67% / 30yr
Gross monthly rent
$2,900
1.02% of price/mo
Monthly cash flow
$498
Show the formula
effective rent − operating expenses − mortgage payment
$2,755 − $882 − $1,375 = $498/mo
NOI (annual)
$22,476
Show the formula
(effective rent − operating expenses) × 12
($2,755 − $882) × 12 = $22,476
Cap rate
7.9%
Show the formula
annual NOI ÷ purchase price
$22,476 ÷ $285,000 = 7.9%
Cash-on-cash return
7.8%
Show the formula
annual cash flow ÷ total cash invested
$5,976 ÷ $76,950 = 7.8%
DSCR
1.36x
Show the formula
monthly NOI ÷ mortgage payment
$1,873 ÷ $1,375 = 1.36x
Break-even occupancy
77.8%
Show the formula
(operating expenses + mortgage payment) ÷ gross rent
($882 + $1,375) ÷ $2,900 = 77.8%
Loan amount
$213,750
Show the formula
purchase price − down payment
$285,000 − $71,250 (25%) = $213,750
Monthly P&I payment
$1,375
Show the formula
amortized loan payment (rate ÷ 12, term × 12)
$213,750 at 6.67% over 30 yrs = $1,375/mo
Annualized return if you sold in year 10
17.7%a year
Counts the $76,950 you put in up front, 10 years of cash flow, and the $191,904 left after paying off the loan and 7% in selling costs. Unlike cash-on-cash, it accounts for when each dollar arrives — which is what makes it comparable to a return quoted on a stock or a bond.
This is the least certain number on the page. Most of it comes from the sale, and the sale assumes 3.5% appreciation every year for 10 years. Change that one assumption and this figure moves further than any of the ones above.
Show the cash flowsThe cash flows
the rate at which every flow below discounts back to zero
- Now-$76,950
- Year 1$5,976
- Year 2$6,756
- Year 3$7,561
- Year 4$8,393
- Year 5$9,252
- Year 6$10,140
- Year 7$11,056
- Year 8$12,002
- Year 9$12,978
- Year 10$205,891
Year 10 includes the sale. Nothing here is money in your pocket until the property actually sells.
Equity grows from $83,538 in year 1 to $220,046 in year 10, driven by loan paydown and property appreciation.
| Year | Equity |
|---|---|
| 1 | $83,538 |
| 2 | $96,334 |
| 3 | $109,662 |
| 4 | $123,546 |
| 5 | $138,010 |
| 6 | $153,083 |
| 7 | $168,793 |
| 8 | $185,168 |
| 9 | $202,242 |
| 10 | $220,046 |
Make this one work
Worked backwards from your numbers — the two levers that bring it inside the criteria.
Max offer that passes
$316,000
Room to pay $31,000 more than your $285,000
Rent needed to pass
$2,612/mo
Holds as a deal down to here — $288/mo of cushion
“Deal” means it clears every screening bar — positive cash flow, DSCR 1.2+, and a 4%+ cash-on-cash return. Holding your other assumptions fixed.
Stress test
2 of five standard shocks flip this deal — here's exactly which ones.
- PASS
Interest rate +1%
$353/mo cash flow
- FLIPSFAIL
Rent comes in 10% lower
$222/mo cash flow
- FLIPSFAIL
Vacancy hits 15%
$208/mo cash flow
- PASS
Operating costs +15%
$366/mo cash flow
- PASS
A $15k surprise repair
cash-on-cash 6.5%
Each shock changes one assumption and re-runs the entire engine. Everything else stays exactly as you set it.
Your deals
Saved deals live in this browser. Share links carry the full analysis — send one to a partner and they see exactly what you see.
Common questions
- What is a good cap rate for a rental property?
- For residential rentals in most U.S. markets, 5% to 8% is the ordinary range, and screening tools commonly treat 5% as the floor. Below 4% you are relying on appreciation rather than income; above 10% is usually compensation for a risk that has not been named yet.
- Does cap rate include the mortgage?
- No. Cap rate is calculated before financing, using net operating income. That is the point — it lets you compare two properties independently of how each buyer paid for them.
- Why is the cap rate on a listing higher than mine?
- Almost always because the listing's NOI assumes lighter expenses: no vacancy allowance, no management fee, no capital reserves, or a property tax figure from before the sale reassesses the property.
The rest of the picture
No single metric decides a deal. Caprately computes all of them at once, from the same inputs.
- DSCR
DSCR is net operating income divided by debt service — how many times over the property's income covers its loan payment.
- Cash-on-cash return
Cash-on-cash return is a year of cash flow divided by the cash you actually put in — down payment, closing costs, and rehab.
- The 1% rule
The 1% rule says a rental should collect at least 1% of its purchase price in monthly rent — a screen, not an analysis.