Cap rate explained: how to calculate it and what counts as good
5 min read
Cap rate is the single number investors reach for first to size up a rental. It's quick, it's useful, and it's easy to misread. Here's what it actually measures and how to use it well.
What a cap rate is
The capitalization rate is a property's net operating income (NOI) divided by its price or value, expressed as a percentage. It answers one question: if you paid all cash, what annual return would the property's operations produce?
Because it strips out financing, the cap rate lets you compare very different deals on the same footing — a paid-off duplex and a leveraged fourplex are measured the same way.
The formula, with an example
Cap rate = NOI ÷ property value. NOI is your annual rental income minus operating expenses (taxes, insurance, management, repairs, vacancy) — but NOT mortgage payments, depreciation, or capital improvements.
Example: a building nets $24,000 a year after operating expenses and is worth $400,000. $24,000 ÷ $400,000 = 0.06, a 6% cap rate. Flip it around and you can also value a property: divide its NOI by the cap rate you require.
What's a 'good' cap rate?
There's no universal number — it's set by the market and the risk. Prime properties in expensive, stable metros often trade at low cap rates (4–5%) because buyers accept less yield for safety and appreciation. Higher-risk or slower-growth markets run higher (7–10%+).
So a 'good' cap rate is really 'appropriate for this market and this risk.' A very high cap rate isn't automatically a bargain — it often signals higher vacancy, deferred maintenance, or a weaker location.
What cap rate doesn't tell you
Cap rate ignores your mortgage, so it says nothing about your actual cash return after debt — that's cash-on-cash return. It also ignores appreciation, tax benefits, and the accuracy of the expense numbers behind the NOI.
The catch is that a cap rate is only as honest as the NOI behind it. If your per-property income and expenses aren't clean, the cap rate is a guess. Rentwelly's per-property P&L gives you a real NOI to divide — so the number you're pricing on is grounded in your actual books.
See it in your own books
Rentwelly puts a real ledger under property management. Start a free 14-day trial.