How to calculate cap rate
- Rent collected for a year, after vacancy, plus other income.
- Minus operating expenses: property tax, insurance, HOA, maintenance and repairs, management.
- That's net operating income (NOI). Divide by the price.
Example
A $300,000 rental at $2,400 a month, 5% vacancy:
- Rent collected: $27,360 a year
- Operating expenses (tax, insurance, maintenance, 8% management): about $9,590
- NOI ≈ $17,770 → cap rate ≈ 5.9%
Run any property through the rental property calculator, which also shows cash flow, cash-on-cash return and DSCR.
Cap rate vs cash-on-cash return
Cap rate ignores the loan. Cash-on-cash return divides yearly cash flow after the mortgage by the cash you put in. With today's mortgage rates, a property can have a decent cap rate and still lose money each month — always check both.
Frequently asked questions
What is a good cap rate?
Many investors look for roughly 5% to 8% or more, but it depends on the market. Expensive, fast-growing areas often have lower cap rates; cheaper markets with more risk often have higher ones.
Does cap rate include the mortgage?
No. NOI is calculated before mortgage payments, so cap rate ignores financing. Cash-on-cash return is the measure that includes your loan.
What is net operating income?
Yearly rent collected (after vacancy) plus other income, minus operating expenses such as property tax, insurance, HOA, maintenance and management — but not the mortgage.
Written by
Finance Specialist & Editor, VaultlyApps
Researched against primary US sources and reviewed by a finance expert on our team. Written for US readers — general education, not financial, tax or legal advice. Editorial policy · Disclaimer
