Cap rate is the most widely used metric in commercial real estate and increasingly used for residential investment properties. It measures a property's unlevered return — what you'd earn if you paid all cash.
Cap Rate Formula
Cap Rate = NOI / Property Value × 100
NOI = Annual Gross Rent
- Vacancy (assume 7% = 0.07 × annual rent)
- Property Management (9% of gross rent)
- Maintenance (1% of property value)
- Property Insurance (~0.5% of value)
- Property Taxes (varies by location, approx 1% nationally)
= NOI
Worked Example
Property Value: $350,000
Annual Gross Rent: $21,600 ($1,800/mo × 12)
- Vacancy (7%): - $1,512
- Mgmt (9%): - $1,944
- Maintenance (1%): - $3,500
- Insurance (0.5%): - $1,750
- Property Tax (1%): - $3,500
= NOI: $9,394
Cap Rate = $9,394 / $350,000 × 100 = 2.68%...
Wait — re-check with better yield market:
Property: $200,000 / Annual Rent: $15,600 ($1,300/mo)
NOI = $15,600 - $1,092 - $1,404 - $2,000 - $1,000 - $2,000 = $8,104
Cap Rate = $8,104 / $200,000 × 100 = 4.05%
Market Cap Rate Benchmarks
| Market Type | Typical Cap Rate Range |
|---|---|
| Gateway cities (NY, SF, LA) | 3–4% |
| Major metros (Austin, Seattle, Denver) | 4–5.5% |
| Secondary cities (Nashville, Atlanta) | 5–6.5% |
| Tertiary markets (Memphis, Indy) | 6–8% |