What is Cap Rate? How to Calculate It for Investment Properties

Northern Virginia Market

The Cap Rate Formula

NOI (Net Operating Income) is annual gross rent minus all operating expenses, before debt service. If a property generates $24,000/year in rent and has $10,000 in operating expenses, NOI = $14,000. At a $280,000 purchase price: Cap Rate = $14,000 / $280,000 = 5.0%.

What Cap Rate Actually Tells You

Cap rate is a property yield metric — it tells you what return you'd earn on an all-cash purchase. It's most useful for comparing similar properties in the same market. A 6% cap rate building is more expensive relative to its income than an 8% cap rate building next door.

What cap rate does NOT tell you: your actual cash-on-cash return (which depends on your financing), your total return (which includes appreciation), or whether the deal works for your specific investment goals.

What's a Good Cap Rate in 2026?

• Class A markets (NYC, SF, DC core): 3–4% cap rates are normal. Low yield, high appreciation expectation.
• Northern Virginia suburban: 4–6% for stabilized rentals in good condition.
• Secondary markets (Midwest, Southeast): 6–9% cap rates common. Higher yield, lower appreciation.
• Value-add / distressed: 8–12%+ going-in cap rates, with stabilized cap rates lower after renovation.

Cap Rate vs. Cash-on-Cash Return

Cash-on-cash return measures actual cash flow relative to cash invested — it accounts for your financing. A property with a 5% cap rate purchased with a 7% mortgage might generate negative cash flow. The same property bought with cash generates a 5% return. Leveraged investors should focus on cash-on-cash return, not just cap rate.

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 for 20+ years.