How to Calculate Cap Rate by Address: A Rental Property Guide

Cap rate (capitalization rate) is the primary metric used to compare income-producing real estate investments. It measures the property's income relative to its value independent of financing — making it a pure property performance metric. Understanding how to calculate and interpret cap rate is essential for any rental investor.

The Cap Rate Formula

Step 1: Calculate Net Operating Income

NOI = Gross Potential Rent − Vacancy Allowance − Operating Expenses. Operating expenses include: property taxes, insurance, property management fees (8–12% of rent), maintenance and repairs, utilities paid by landlord, and capital expenditure reserves. Note: mortgage payments are NOT included in NOI — cap rate is a financing-neutral metric.

Example Cap Rate Calculation

Property price: $280,000. Monthly rent: $2,000 ($24,000/year). Vacancy (5%): −$1,200. Operating expenses: −$8,400 (35% of gross). NOI = $24,000 − $1,200 − $8,400 = $14,400. Cap Rate = $14,400 ÷ $280,000 × 100 = 5.1%.

What Is a Good Cap Rate?

• 4–5%: Institutional-grade assets in premium urban markets. Lower return but higher quality and appreciation
• 6–8%: Solid mid-market rental properties in most major metros. Most common target range for individual investors
• 9–12%+: Value-add or secondary market properties. Higher yield, higher risk, less appreciation

Cap Rate vs. Cash-on-Cash Return

Cap rate ignores financing. Cash-on-cash return measures your actual cash yield on invested capital (down payment + closing costs). A property with a 7% cap rate might produce a 10–12% cash-on-cash return if leveraged appropriately, or 4–5% if you paid cash. Both metrics matter — cap rate for property comparison, cash-on-cash for your actual return on investment.

Dan White is a licensed Virginia real estate agent at Pearson Smith Realty and founder of FreeDealCalc.com. He has been investing in Northern Virginia real estate for 20+ years.