Calculate cap rate, NOI, gross rent multiplier, and cash-on-cash return for investment properties.
Auto-updated · Verified daily against IRS, Fed & Treasury sources
Enter your numbers below
$3,000/month
8% of rent
For cash-on-cash calc
Paul, 45, warehouse supervisor, is evaluating a duplex on the east side of Columbus. List price $400,000. Two units at $1,050/mo each (market rents). He plans to self-manage initially.
Takeaway: A 3.25% cap rate is thin — Columbus stabilized multifamily typically trades around 5–6% cap. At $400k this property is priced for appreciation, not cash flow. Paul needs to negotiate closer to $260–$280k for a 5% cap, or verify rents are below market. Cap rate ignores financing; cash-on-cash return with 25% down at 7.25% will be negative at this price.
Many users input gross annual rent without deducting vacancy. Market-rate vacancy in single-family rentals runs 5–8% nationally; in C-class multifamily it can reach 10–15%. A $36,000 gross rent input vs. $34,200 (5% vacancy) changes cap rate from 5.4% to 5.13% at a $650k purchase — enough to flip deal viability.
Roof, HVAC, appliance replacement costs are capital items — not in NOI by GAAP — but must be funded. Omitting a $200/month capex reserve on a $250k property inflates NOI by $2,400/yr and overstates cap rate by ~0.5pp. Sophisticated buyers apply 10–15% gross rent reserve for capex.
Rental Property ROI CalculatorCap rate tells you what the market is pricing risk at. A 5% cap rate financed at 7% creates negative leverage — return on equity is below cost of debt. You may want to model cash-on-cash return separately to evaluate actual investment merit.
Cash-on-Cash Return CalculatorProperty management fees (8–12% of gross rents), leasing fees (50–100% of first month's rent), and bookkeeping costs reduce NOI materially. Self-managed properties show inflated cap rates vs. professionally managed comparables — non-comparable when selling.
A purchase triggers reassessment in states like California (Prop 13) and Texas. A $200k property bought for $350k may be reassessed to $350k — raising property tax from $2,000 to $3,500/yr, reducing NOI by $1,500 and compressing cap rate at the new basis.
Based on your inputs
NOI: $21,840/year
| Gross Annual Rent | $36,000 |
|---|---|
| Less: Vacancy | -$2,880 |
| Effective Gross Income | $33,120 |
| Less: Operating Expenses | -$11,280 |
| Net Operating Income (NOI) | $21,840 |
| Cap Rate | 7.28% |
| Gross Rent Multiplier | 8.3x |
| Down Payment | $75,000 |
| Annual Debt Service | $17,963 |
| Annual Cash Flow (after debt) | $3,877 |
| Cash-on-Cash Return | 5.17% |
Reality Score:save 3 numbers across housing, debt & cash to see how your full picture holds up (0–100). One calc alone can't tell you that.
Stays in your browser. Never sent to us.
Analyze 3+ calcs to unlock your Financial Picture dashboard (cross-analysis of all your numbers).
The capitalization rate (cap rate) is the most common metric for evaluating real estate investments. It represents the unlevered return — what you'd earn if you paid all cash. Different property types and locations produce dramatically different cap rates.
Single-Family Rentals: 4-8% in most markets. Premium neighborhoods in major cities (San Francisco, NYC, Boston) might see 3-4% because property values are high relative to rents. Secondary markets (Memphis, Indianapolis, Cleveland) often produce 7-10% because properties are cheap relative to rents. The trade-off: lower-cap-rate properties tend to appreciate more; higher-cap-rate properties may not appreciate but generate more cash flow.
Multi-Family (2-4 units): 5-9%. Small multi-family often provides better cap rates than single-family because the price per unit is lower. A duplex in Indianapolis might cost $200,000 and rent for $2,200/month total — a cap rate of roughly 8-9% after expenses. The same investment in Los Angeles costs $800,000 for $3,500/month in rent — a 2-3% cap rate.
Commercial (5+ units, retail, office): 5-12% depending on class and location. Class A office in Manhattan: 4-5%. Class B retail in a suburban strip mall: 7-9%. Self-storage facilities: 5-8%. Industrial/warehouse: 5-7%. Commercial properties tend to have longer leases and more predictable income, which supports lower cap rates.
New investors often fixate on high cap rates, assuming bigger numbers mean better investments. This is a dangerous oversimplification. Low cap rates in expensive markets often correlate with: stronger appreciation potential (your $500K property in Austin might be worth $650K in 5 years), better tenant quality (fewer evictions, less damage, more reliable rent payments), lower maintenance costs (newer construction, better-maintained properties), more liquidity (easier to sell when you may want to exit).
A 4% cap rate property in a growing metro that appreciates 5% annually produces a total return of 9% per year — better than a 8% cap rate property in a declining market that loses 2% in value annually (net return: 6%).
The key is understanding that cap rate measures only operating income relative to price. It ignores: appreciation (or depreciation), tax benefits (depreciation deductions, 1031 exchanges), leverage (financing amplifies returns), and principal paydown (your tenant is paying off your mortgage).
Cap rate is most useful when comparing similar properties in the same market. If you're evaluating three duplexes in the same neighborhood, the one with the highest cap rate (after verifying accurate income and expense figures) is objectively the best deal — all else being equal. But comparing cap rates across markets or property types is less meaningful because the underlying risk profiles differ.
Think of cap rate like a stock's dividend yield. A utility company yielding 4% and a startup yielding 0% aren't directly comparable — they're different investments with different risk/return profiles. Similarly, a 4% cap rate Class A apartment building and a 9% cap rate mobile home park are fundamentally different investments despite both being"real estate."
The market cap rate (average for similar properties in the area) tells you whether a specific property is priced above or below market. If the market cap rate for duplexes in your area is 7% and you find one at 9%, either you've found a deal or there's a problem the market is pricing in (bad location, deferred maintenance, problem tenants). Investigate before assuming it's a bargain.
Cap Rate = NOI / Property Price. It's that simple. Net Operating Income divided by purchase price. No consideration of financing, down payment, or debt service. It answers:"What's this property's unleveraged annual return?" A $300,000 property with $21,000 NOI has a 7% cap rate regardless of how you finance it.
Cash-on-Cash Return = Annual Pre-Tax Cash Flow / Total Cash Invested. This accounts for your actual money in the deal. If you put $75,000 down on that $300,000 property and your annual cash flow (after mortgage payments) is $6,000, your cash-on-cash return is 8% ($6,000 / $75,000). If you only put $60,000 down (with seller financing covering more), your cash flow might be $4,500 but your return jumps to 7.5% on less capital.
Leverage is what makes real estate investing so powerful — and so risky. Let's trace through a complete example. Property: $300,000 purchase price. Gross annual rent: $36,000 ($3,000/month). Operating expenses: $15,000/year (taxes, insurance, maintenance, management). NOI: $21,000. Cap rate: 7%.
Scenario A — All Cash: You invest $300,000. Annual return = $21,000. Cash-on-cash = 7% (same as cap rate — no leverage). Simple, safe, and unexciting.
Scenario B — 75% LTV Mortgage: Down payment: $75,000. Loan: $225,000 at 7%, 30-year. Annual debt service: $17,952. Annual cash flow: $21,000 - $17,952 = $3,048. Cash-on-cash: $3,048 / $75,000 = 4.1%. Wait — that's lower than the all-cash scenario? Yes, because the mortgage rate (7%) exceeds the cap rate (7%) after considering principal and interest. This is called"negative leverage."
Scenario C — Better Rate: Same deal, but mortgage at 5.5%. Annual debt service: $15,324. Cash flow: $21,000 - $15,324 = $5,676. Cash-on-cash: 7.6%. Now leverage is working for you because the cost of debt (5.5%) is below the cap rate (7%). This is"positive leverage."
The principle: leverage amplifies returns when cost of debt < cap rate, and destroys returns when cost of debt > cap rate. In today's higher-rate environment, many properties have negative leverage — meaning more cash down actually produces better returns.
Use cap rate when: comparing multiple properties regardless of financing, evaluating market pricing (is this area expensive or cheap?), determining if a property is overpriced relative to its income, and communicating with other investors (cap rate is the universal language).
Use cash-on-cash when: deciding between investment opportunities with different financing structures, optimizing your capital allocation (should I put 20% or 25% down?), projecting actual annual returns for your portfolio, and comparing real estate returns to stock market returns.
Use both together to get the full picture. A high cap rate with low cash-on-cash signals: the property generates good income relative to its price, but your financing terms are eating most of the profit. A low cap rate with high cash-on-cash signals: favorable financing is amplifying modest underlying returns — which works until rates rise or the loan resets.
Neither metric captures appreciation, tax benefits, or principal paydown. For a complete investment analysis, also calculate: total return (cash flow + appreciation + principal paydown + tax benefits), internal rate of return (IRR), and equity multiple (total cash returned / total cash invested). Our investment property ROI calculator handles the full analysis.
Generally 5-8% for residential rentals. 4-5% in expensive markets (NYC, SF), 7-10% in affordable markets (Memphis, Cleveland). Higher isn't always better — it often signals higher risk.
Cap Rate = Net Operating Income (NOI) / Property Price. NOI = Gross Rent − Vacancy − Operating Expenses. Example: $24,000 NOI on a $300,000 property = 8% cap rate.
No. Cap rate assumes an all-cash purchase. It measures the property's return independent of financing. Use cash-on-cash return to account for mortgage payments.
GRM of 8-12 is typical for residential properties. Lower GRM = better deal (cheaper relative to rent). GRM = Property Price / Annual Gross Rent.
Cap rate measures unlevered operating return. ROI includes all returns: cash flow, appreciation, tax benefits, and principal paydown. Cap rate is one component of total ROI.
Start with gross rental income, subtract a vacancy allowance of 5 to 10 percent, then subtract all operating expenses including property taxes, insurance, maintenance, management fees, and utilities you pay. Do not subtract mortgage payments since NOI measures the property's return independent of financing.
A cash-on-cash return of 8 to 12 percent is generally considered good for residential rentals. This metric divides annual pre-tax cash flow by total cash invested including the down payment and closing costs. Unlike cap rate, it accounts for your specific financing terms and leverage.
Vacancy directly reduces net operating income, which lowers your actual cap rate. A property advertised at 8 percent cap rate with 0 percent vacancy assumed drops to roughly 7.2 percent with a realistic 10 percent vacancy factor. Always include vacancy in your projections rather than using gross rent.
The 1 percent rule states that monthly rent should be at least 1 percent of the purchase price. A $200,000 property should rent for at least $2,000 per month. Properties meeting this threshold tend to produce positive cash flow, though the rule works best as a quick screening tool.
High-tax states like New Jersey and Illinois can reduce cap rates by 1 to 2 percentage points compared to low-tax states like Alabama or West Virginia. Annual property taxes ranging from 0.5 to 2.5 percent of property value significantly impact NOI and should be verified with the county assessor.
Cap Rate = NOI / Property Price × 100
NOI = Effective Gross Income − Operating Expenses
GRM = Property Price / Annual Gross Rent
Cash-on-Cash = Annual Cash Flow / Cash Invested × 100
Every formula on this page traces to a federal agency, central bank, or peer-reviewed institution. We cite the rule-makers, not secondhand blogs.
Found an error in a formula or source? Report it →
Calculations are for educational purposes only. Consult a qualified financial advisor for personalized advice.