The foundational metric for investment property analysis. Calculate your capitalization rate and net operating income — before you make an offer.
Cap rate is NOI divided by property value — it tells you the annual unlevered return you'd earn if you paid all cash. A 6% cap rate means $6 of income for every $100 of property value. It's the primary metric for comparing properties because it removes financing from the equation.
Typical ranges in 2026: single family rentals 4–6%, small multifamily 5–7%, commercial 6–9%. Higher cap rates signal either better value or higher risk — often both. In a competitive market, compressing cap rates mean prices have risen faster than rents. Know your market's average before deciding if a deal is good.
Capitalization rate, or cap rate, is the most widely used metric for comparing investment properties. It measures the annual return a property generates relative to its current market value, assuming you paid cash with no financing. Cap rate lets you compare a duplex in Ohio to an apartment building in Texas on equal footing — the financing terms don't muddy the picture.
Cap rate equals net operating income divided by current property value. Net operating income (NOI) is your annual gross rent minus all operating expenses: property taxes, insurance, maintenance, property management fees, and vacancy allowance. It does not include mortgage payments — debt service is deliberately left out so the metric reflects the property's intrinsic performance.
There's no universal answer — it depends entirely on the market and property type. In high-demand urban markets like New York or San Francisco, cap rates of 3% to 4% are common because appreciation expectations drive prices up. In secondary and tertiary markets, 6% to 9% is more typical. Generally, higher cap rates mean more income relative to price but often signal higher risk, lower appreciation potential, or both.
Cap rate is often confused with cash-on-cash return, but they measure different things. Cash-on-cash return accounts for your actual financing — it tells you what you earn on the cash you put in, after mortgage payments. Cap rate ignores financing entirely. Both metrics matter; cap rate for comparing properties, cash-on-cash for evaluating your actual deal structure.
Cap rate works in reverse too. If you know the prevailing cap rate for a property type in a market, you can estimate what a property should be worth based on its NOI. A property generating $60,000 NOI in a market with a 6% cap rate implies a value of $1 million. This is how commercial real estate appraisers and buyers think about valuation — income drives price, not the other way around.
Cap rate is a snapshot, not a forecast. It doesn't account for rent growth, appreciation, deferred maintenance, or neighborhood trends. A 7% cap rate property with a deteriorating tenant base and deferred roof replacement may underperform a 5% cap rate property in a growing market. Always pair cap rate with a longer-term cash flow analysis before making a purchase decision.