How to Calculate Cap Rate: Formula, Examples & 2026 Benchmarks

What Is Cap Rate?

Capitalization rate — universally shortened to cap rate — is the single most-used metric in commercial and residential income property analysis. It tells you the annual yield a property generates assuming you bought it entirely with cash (no mortgage). The higher the cap rate, the more income per dollar invested.

Cap rate strips out the noise of financing so you can compare a duplex in Cleveland to an apartment complex in Phoenix on equal footing. It's the "apples-to-apples" yardstick every investor needs.

The Cap Rate Formula

The capitalization rate equation has exactly two inputs:

That's it. The challenge — and where most investors make mistakes — is calculating NOI correctly.

How to Calculate NOI Step by Step

Net Operating Income is gross income minus operating expenses. Here's the exact sequence:

1. Gross Potential Rent — what the property would earn at 100% occupancy (annual)
2. Minus vacancy & credit loss — typically 5–10% depending on market
3. = Effective Gross Income (EGI)
4. Minus operating expenses — property taxes, insurance, maintenance, management fees, utilities (if owner-paid), reserves
5. = Net Operating Income (NOI)

Critical: NOI does NOT include mortgage payments, depreciation, or capital improvements. Including those is the most common beginner mistake and will give you a completely wrong cap rate.

Cap Rate Calculation: Three Real Examples

Example 1 — Single-Family Rental (Cleveland, OH)

Purchase Price	$185,000
Gross Annual Rent	$18,000
Vacancy (8%)	−$1,440
Operating Expenses	−$7,200
NOI	$9,360
Cap Rate	5.06%

Calculation: $9,360 ÷ $185,000 = 5.06%

Example 2 — Duplex (Indianapolis, IN)

Purchase Price	$320,000
Gross Annual Rent (2 units × $1,400)	$33,600
Vacancy (6%)	−$2,016
Operating Expenses	−$11,200
NOI	$20,384
Cap Rate	6.37%

Calculation: $20,384 ÷ $320,000 = 6.37%

Example 3 — Small Apartment Building (Columbus, OH)

Purchase Price	$750,000
Gross Annual Rent (8 units × $1,000)	$96,000
Vacancy (7%)	−$6,720
Operating Expenses	−$38,400
NOI	$50,880
Cap Rate	6.78%

Calculation: $50,880 ÷ $750,000 = 6.78%

What Is a Good Cap Rate? (2026 Benchmarks)

There's no single "good" cap rate — it depends entirely on your investment strategy and market. Here's how to read the numbers:

Cap Rate Range	What It Means	Typical Markets
Below 4%	Trophy asset / speculative appreciation play	NYC, SF, LA
4–5%	Class A multifamily, stable but low yield	Austin, Denver, Miami
5–7%	Balanced cash flow and appreciation	Indianapolis, Columbus, Charlotte
7–9%	Strong cash flow, moderate appreciation	Cleveland, Memphis, Detroit
9%+	High cash flow, value-add or distressed	Rural markets, C-class assets

Rule of thumb: For a buy-and-hold strategy in 2026, target a minimum 5.5–6% cap rate in most markets. In high-appreciation metros, 4–5% can still make sense if you're banking on price appreciation.

Cap Rate by City — 2026 Market Data

City	Avg Cap Rate	Trend
Indianapolis, IN	6.8%	Stable
Columbus, OH	6.3%	Rising
Cleveland, OH	7.9%	Stable
Memphis, TN	7.4%	Stable
Charlotte, NC	5.6%	Compressing
Austin, TX	4.8%	Expanding
Denver, CO	4.5%	Stable
Miami, FL	4.2%	Expanding

Cap Rate vs Other Metrics: What's the Difference?

Investors frequently confuse cap rate with cash-on-cash return and ROI. Here's when to use each:

• Cap Rate — Compares properties independent of financing. Use it to evaluate deals and market pricing.
• Cash-on-Cash Return — Measures actual cash yield on your invested equity, including mortgage payments. Use it to evaluate your specific financing scenario.
• Gross Rent Multiplier (GRM) — Price divided by gross annual rent. Faster to calculate, less accurate than cap rate.
• Total ROI — Combines cash flow + appreciation + loan paydown. Useful for long-term hold analysis.

A property with a 7% cap rate might have a 12% cash-on-cash return if you use leverage effectively — that's why both metrics matter.

Try the Cap Rate Calculator

Don't do the math by hand. Use our free Cap Rate Calculator — enter your property details and get instant NOI, cap rate, gross rent multiplier, and expense ratio with a full income statement breakdown.

5 Common Cap Rate Mistakes to Avoid

1. Including mortgage payments in expenses. NOI is pre-financing. Adding your PITI destroys the metric's purpose.
2. Using asking price instead of market value. If the seller is overpriced, their "6% cap rate" is fictional. Use actual comps.
3. Forgetting capital expenditure reserves. Set aside 5–10% of gross rent for CapEx (roof, HVAC, appliances). Omitting this inflates your NOI.
4. Using gross rent instead of effective gross income. A 0% vacancy assumption is fantasy. Use realistic local vacancy rates.
5. Comparing cap rates across property classes. A 7% cap rate on a Class C property is not comparable to 7% on a Class A — the risk profiles are completely different.

How to Use Cap Rate When Making an Offer

If you know what cap rate you need, you can work backwards to determine your maximum offer price:

Example: NOI = $24,000/year. You want a minimum 7% cap rate. Max price = $24,000 ÷ 0.07 = $342,857. If the seller is asking $380,000, you know the deal doesn't meet your criteria — or you need to find ways to increase NOI.

Frequently Asked Questions

How do I calculate cap rate?

Divide the property's annual Net Operating Income (NOI) by the current market value or purchase price. NOI = gross rent minus vacancy minus operating expenses (excluding mortgage). Example: $18,000 NOI ÷ $300,000 value = 6.0% cap rate.

What is a good cap rate for rental property?

In most US markets in 2026, a cap rate between 5–8% is considered solid for a buy-and-hold investor. Cash-flow-focused investors target 7%+. In high-appreciation coastal markets, 4–5% is typical and accepted.

What is the cap rate formula?

Cap Rate = Net Operating Income ÷ Property Value. Or rearranged: Property Value = NOI ÷ Cap Rate. This rearranged version lets you determine how much to pay for a property given your required return.

How do you calculate capitalization rate?

Step 1: Calculate annual gross rent. Step 2: Subtract vacancy loss (typically 5–10%). Step 3: Subtract all operating expenses (taxes, insurance, maintenance, management). Step 4: Divide the result (NOI) by the property's value or purchase price.

What is the cap rate equation?

The capitalization rate equation is: Cap Rate (%) = NOI / Current Market Value × 100. Where NOI is net operating income — gross rents minus vacancy and operating expenses, not including debt service.

How do you calculate the cap rate of a property?

Gather: annual gross rent, local vacancy rate, and all annual operating costs. Compute NOI = (gross rent × (1 − vacancy rate)) − annual expenses. Then: cap rate = NOI ÷ purchase price. Use our cap rate calculator to automate this instantly.

What is a cap rate calculation example?

Property priced at $350,000. Gross annual rent: $28,000. Vacancy 8% = $2,240 loss. Operating expenses: $10,500. NOI = $28,000 − $2,240 − $10,500 = $15,260. Cap rate = $15,260 ÷ $350,000 = 4.36%.

What is the cap rate calculation formula for real estate?

It's the same as the standard formula: Cap Rate = NOI / Property Value. In commercial real estate, the cap rate is used to value buildings: Value = NOI / Market Cap Rate. This is how appraisers price apartment buildings, retail centers, and office parks.

What is determining cap rate in real estate?

Cap rate is set by market supply and demand for investment property. When prices rise faster than rents, cap rates compress (fall). When rents rise faster than prices, cap rates expand. Rising interest rates tend to push cap rates up as investors demand higher yields.