Cap rate explained (with examples)
Cap rate is a property's first-year net operating income divided by its price (or current value), expressed as a percentage. It is the unleveraged yield, so it ignores financing. Single-family rentals commonly fall in the 5% to 8% range; what counts as good depends entirely on the market and risk.
Cap rate is the first number investors compare across deals because it strips out financing and judges the property on its own. It is the common language agents and investors use to talk about price.
What is cap rate?
Cap rate (capitalization rate) is annual net operating income divided by the purchase price or current market value. Because financing is excluded, two investors comparing the same building get the same cap rate, no matter how each would fund it.
A worked example
A single-family rental lists at $350,000 and rents for $2,800 a month ($33,600 a year). Allow 5% for vacancy ($1,680) and $8,400 a year in operating expenses, leaving NOI of about $23,520.
What is a good cap rate?
A "good" cap rate is relative, not absolute. Cap rates move inversely to interest rates and are often benchmarked against the 10-year Treasury yield. As of 2025 to 2026, typical ranges look like this:
| Cap rate | Read |
|---|---|
| 7% and up | Strong yield, common in higher-cash-flow Midwest and South markets. |
| 4% to 7% | Typical of stable, lower-risk markets. Fine if you also expect appreciation. |
| Below 4% | You are paying up, usually in pricey coastal or high-growth metros. |
A 9% cap in a declining town can be worse than a 5% cap in a growing one. Higher cap rate means higher yield but usually higher risk.
Cap rate vs cash-on-cash vs GRM
| Metric | Measures | Uses |
|---|---|---|
| Cap rate | The property, unleveraged | NOI ÷ price |
| Cash-on-cash | Your money, after the loan | Cash flow ÷ cash invested |
| GRM | A rough screen, gross only | Price ÷ gross rent |
Use cap rate to shortlist deals, then switch to cash-on-cash and DSCR to decide whether a specific one works for you.
When cap rate misleads you
- It ignores financing. Your real return as a leveraged buyer is the cash-on-cash, not the cap rate.
- Garbage in, garbage out. A high cap built on optimistic rent or a forgotten roof is fiction.
- It assumes stable income. Cap rate is misleading on a vacant or value-add property until it is stabilized.
Frequently asked questions
What is a good cap rate for rental property?
For single-family rentals, 5% to 8% is a common range, with 7%+ considered strong. It is market-dependent: prime, low-risk assets trade at 4% to 6%, while higher-risk or higher-cash-flow markets can run 8% to 10%+.
Is a higher or lower cap rate better?
A higher cap rate means a higher income yield, but usually higher risk. A lower cap rate means a more expensive, often safer or higher-growth asset. The right level depends on your risk appetite and whether you are buying for cash flow or appreciation.
What is the difference between cap rate and cash-on-cash return?
Cap rate is the unleveraged return on the property (NOI ÷ price) and ignores your loan. Cash-on-cash is the return on the actual cash you invested after financing (annual cash flow ÷ cash invested). Cap rate compares properties; cash-on-cash measures your return.
Why do cap rates rise when interest rates rise?
When borrowing gets more expensive, buyers will pay less for the same income, so prices fall relative to NOI and cap rates expand. Cap rates are often benchmarked against the 10-year Treasury yield for this reason.
Should I use purchase price or market value?
Use the purchase price when evaluating a deal you are buying, and current market value when assessing a property you already own. The Proplify calculator uses the price you enter.