Cap rate is annual net operating income divided by purchase price — the unlevered yield of a rental. 5–8% is typical for US single-family rentals. Above 10% usually means risk. Below 5% usually means paying for future appreciation.
The formula
cap rate = (annual rent − annual expenses) / purchase price
"Expenses" means operating costs: property tax, insurance, maintenance reserve, vacancy allowance, management, HOA. Not the mortgage — cap rate is unlevered on purpose, so it lets you compare properties independently of financing.
Typical ranges
- 3–5% — hot coastal markets, stable jobs, high appreciation expected. You're buying for the price growth more than the yield.
- 5–7% — most stable US metros. The sweet spot for long-term rentals.
- 7–9% — secondary markets, smaller cities, lower appreciation outlook. More yield, less future price growth.
- 9–12% — rural, small towns, C-class neighborhoods. Higher yield justified by higher risk and less appreciation.
- 12%+ — usually something wrong: bad neighborhood, difficult tenants, problematic property, or the numbers are hiding uncounted expenses.
What cap rate doesn't tell you
- Appreciation — cap rate is yield only. Future price growth is separate.
- Your actual return — leverage (mortgage) changes the math dramatically. A 6% cap rate levered 75% can produce 10–12% cash-on-cash.
- Tax treatment — depreciation, deductions, and 1031 exchanges meaningfully change real after-tax yield.
- Quality of the number — if expenses are underestimated or rent is optimistic, the cap rate is fiction.
// TRY THE TOOL
CALCULATE CAP RATE.
Price + monthly rent + expenses → cap rate, gross yield, and monthly cash flow.
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