Reference · Valuation
Cap rate explained for rental properties
What is cap rate?
Cap rate—capitalization rate—is the ratio of annual net operating income (NOI) to the property’s price or value, expressed as a percentage. It summarizes how much income the asset generates relative to its cost in one number, which helps compare deals on a similar basis. Cap rate is not a guarantee of return; it ignores financing, taxes, appreciation, and your specific leverage.
Higher cap rates often imply higher expected income relative to price (sometimes with higher perceived risk); lower cap rates often imply lower yield relative to price in competitive markets. Always read cap rate alongside condition, location, and your own cost of capital.
How to calculate cap rate
Cap rate = Net Operating Income ÷ Value (or purchase price) Example: NOI = $12,000/year Purchase price = $200,000 Cap rate = 12,000 ÷ 200,000 = 6.0%
Use the same basis for NOI and value (e.g., both annual). If you use a broker’s pro forma NOI, reconcile it to your own expense lines.
What is a “good” cap rate?
| Reality check | Takeaway |
|---|---|
| No universal good number | Cap rate varies by market, asset class, and risk. A 8% cap in one city is not automatically better than 5% in another without context. |
| Compare apples to apples | Match NOI definitions and inclusions when you compare listings or offering memos. |
Limits of cap rate
Cap rate does not include mortgage payments, closing costs, or your tax situation. For levered returns, pair cap rate with cash-on-cash return and DSCR.
Try the calculator
Estimate with your own inputs—numbers are educational, not lender instructions.
Frequently asked questions
- Is cap rate the same as cash-on-cash return?
- No. Cap rate uses NOI and value without your loan. Cash-on-cash compares cash flow to the cash you invested and depends on financing.
- Should I use list price or my offer for cap rate?
- Use the price that reflects the deal you are analyzing—often your expected purchase price or appraised value depending on the question you are answering.
- Does Veld show cap rate?
- Yes, where applicable, in calculators and property views based on inputs and policies documented in the product. Treat outputs as estimates.