How do you calculate cap rate?

Divide the property's annual net operating income (rent minus operating expenses, before mortgage) by its price or value, then express it as a percentage. A $24,000 NOI on a $400,000 property is a 6% cap rate.

Is a higher cap rate better?

Not always. A higher cap rate means more income per dollar invested, but it often signals more risk, a weaker market, or more hands-on management. Balance the higher return against the added risk.

Does cap rate include the mortgage?

No. Cap rate uses net operating income before any loan payment, which is what makes it useful for comparing properties regardless of financing. To factor in your loan, use cash-on-cash return instead.

Deal Analysis

What Is a Good Cap Rate for Real Estate Investors? (2026)

There's no universal 'good' number — only good relative to the market. Here's how to judge it.

June 17, 2026 · 6 min read

Quick answer

A 'good' cap rate depends on the market and the asset. As a rule of thumb, 4–5% is common in expensive, stable metros, 6–8% in balanced markets, and 8% or higher in cheaper or higher-risk areas. Cap rate equals net operating income divided by property value — a higher rate means more income per dollar, but usually more risk.

What cap rate measures

Capitalization rate is a property's annual net operating income (NOI) expressed as a percentage of its price or value. Because it ignores financing, it lets you compare income properties on equal footing — a clean read on how much income each dollar of value produces. NOI is rent minus operating expenses (taxes, insurance, maintenance, management, vacancy), before any mortgage payment.

Cap Rate = Net Operating Income ÷ Property Value

What counts as a good cap rate

The honest answer is 'it depends on where and what.' A 4% cap rate can be excellent in a supply-constrained coastal metro and poor in a cheap rust-belt market. Judge a property against comparable rentals in the same area, not a fixed benchmark.

Market type	Typical cap rate	Trade-off
Expensive, stable metro	4–5%	Lower income, more appreciation & stability
Balanced mid-size market	6–8%	Middle ground on income and risk
Cheap or higher-risk area	8%+	More income, more risk and management

Cap rate vs. cash-on-cash

Cap rate deliberately excludes your loan, so two investors buying the same property at the same price have the same cap rate regardless of financing. Cash-on-cash return, by contrast, measures the cash flow against the actual cash you put in — so it reflects leverage. Use cap rate to compare properties; use cash-on-cash to judge your return on a financed deal.

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Frequently asked questions

What is a good cap rate?: It varies by market. Roughly, 4–5% is common in expensive, stable metros, 6–8% in balanced markets, and 8%+ in cheaper or higher-risk areas. Compare a property's cap rate to similar properties in the same area rather than to a single benchmark.
How do you calculate cap rate?: Divide the property's annual net operating income (rent minus operating expenses, before mortgage) by its price or value, then express it as a percentage. A $24,000 NOI on a $400,000 property is a 6% cap rate.
Is a higher cap rate better?: Not always. A higher cap rate means more income per dollar invested, but it often signals more risk, a weaker market, or more hands-on management. Balance the higher return against the added risk.
Does cap rate include the mortgage?: No. Cap rate uses net operating income before any loan payment, which is what makes it useful for comparing properties regardless of financing. To factor in your loan, use cash-on-cash return instead.