Cap rate is net operating income divided by price. The trap is using the listing's pro forma income. This calculator rebuilds NOI from rent, vacancy and real expenses first.
Capitalization rate is the property's income return with financing stripped out. It answers: if you paid all cash, what would this building yield on its price?
Cap rate = annual net operating income ÷ purchase price
Net operating income (NOI) is rent after vacancy and all operating expenses, but before any mortgage payment. Because the loan is excluded, cap rate lets you compare two properties on their own merits regardless of how each buyer would finance them, and it is the number appraisers and commercial buyers quote to each other.
The defaults above: $2,400 rent is $28,800 gross. Subtract 6% vacancy and 18% for maintenance and management, then $3,600 of taxes and $1,600 of insurance, and NOI is about $16,688. On a $300,000 price that is a 5.56% cap rate: solid income for a coastal market, mediocre for the midwest.
There is no universal number, and that is not a dodge; it is how the metric works. A 7% cap rate in a declining neighborhood can be worse than 5% on a block where rents climb every year. As broad 2026 context: many buy-and-hold investors treat roughly 6% and up as a healthy cash-flow cap rate, while 4% to 5% is typical in expensive appreciation markets. Compare against similar properties in the same market, and read the full cap rate guide for the market-by-market logic.
The free DealGauge calculator grades any rental A to F across cash flow, cash-on-cash, financeability and cap rate, then solves the most you could pay and still hit your targets. No account, no email, no property limit.
Grade a deal freeHigher cap rates usually price in higher risk: rougher neighborhoods, older buildings, less reliable tenants. The number is a starting question, not a verdict.
No. That is by design, so two buyers with different financing can talk about the same building with the same number. Use cash-on-cash for the after-mortgage view.
Almost always because the listing used gross or pro forma income. Recomputing NOI with vacancy and real expenses routinely knocks one to two points off the advertised figure.
Related: What is a good cap rate? · Cash on cash calculator · Rental yield calculator
General information and educational content only, not investment, tax, or legal advice. Benchmarks are common rules of thumb, not guarantees or projected results. Results are estimates from the numbers you enter. Verify every figure and consult a qualified professional before purchasing any property.