Rental Property Cap Rate in 5 Minutes (With Example)

Cap rate is the one number that lets you compare two rentals in seconds — no spreadsheets open. Here is the formula, a worked example, and the mistakes that make bad deals look good.

The formula

Cap rate = Net Operating Income ÷ Purchase price. That’s it. A $200,000 property earning $16,000 a year nets an 8% cap rate.

What counts as NOI (and what doesn’t)

NOI = annual rent minus vacancies, taxes, insurance, maintenance, property management. Minus mortgage payments? No — cap rate measures the property, not your loan. Mixing financing in is mistake #1.

Worked example: $200,000 duplex

1. Rent: $1,800/mo × 12 = $21,600.
2. Vacancy (8%): −$1,728 → $19,872.
3. Taxes $2,400 + insurance $1,200 + maintenance $1,800 + management (10%) $1,987 = −$7,387.
4. NOI = $19,872 − $7,387 = $12,485.
5. Cap rate = $12,485 ÷ $200,000 = 6.2%.

What’s a good cap rate?

Depends on the market: pricey coastal cities often show 3–5%, Midwest cash-flow markets 7–10%+. Higher cap = higher return and usually higher risk or older stock. Compare within one market, never across the country.

Cap rate vs its cousins

Cash-on-cash: return on your cash invested (includes the mortgage) — use it after cap rate passes your filter. Monthly cash flow: what lands in your pocket after all payments — must stay positive.

3 mistakes that inflate your numbers

1. Forgetting vacancy — assume 5–10%, always.
2. Skipping management cost even if you self-manage (your time isn’t free).
3. Using pro-forma rent instead of actual market rent.

The bottom line

Run every deal through the same calculator before emotions kick in: Budget Spreadsheets.